Why Our Top Natural Gas Stock Will Soar In 2024

A 7.7% payer that we are monitoring very close just did something weird for a stock with such a high payout: it raised its dividend – for the 29th consecutive year!

Most people will tell you that a 7.7% payer with a constantly growing dividend is a myth at best – or a “yield trap” at worst. But these hikes are just another step on the timeline for this company’s investors.

Its latest hike – and forecast for 2024 – was released in a company press release late last week. The company is a little-known natural gas shipper (at least here in the United States). It’s a smart buy as gas prices climb lower, but start to rise from the sub-$2 lows we saw earlier in 2023:

I understand that this chart might make you think we are late to the party here. So let’s extend our vision to a year ago:

In other words, it’s a great time to buy, when prices are still low but are on a sustained upward trend. You may have heard the old saying that “the cure for low prices is low prices.” Well, that’s that saying in action.

Which brings me back to that “attractive dividend” growing by 7.7%.

The company paying out these rich payments is Canada’s largest Enbridge (ENB), which owns 74,000 miles of pipelines stretching across North America. It goes unnoticed here in the United States, but it shouldn’t: it transports about 20 percent of the gas used here each year.

Its “American invasion” continues: on September 4, Enbridge announced the purchase of three American utilities. When the deal closes in 2024, the company will add seven million customers in Ohio, Utah, Wyoming, Idaho and North Carolina to the 15 million it serves north of the border.

Beyond that, ENB also has approximately $8 billion (Canadian) committed to renewable energy projects in operation and construction (and the transmission networks that serve them).

It’s a combination of scale and diversification that we love to see. But before we go any further, if you’re wary of a 7.7% payout in the volatile energy sector, I understand. But here’s the problem: Even though ENB’s inventory is influenced by gas prices, the company is a tollgate, charging customers for each thermal unit of gas that flows through its pipelines. This reduces its price sensitivity and essentially makes it a “pseudo-utility.”

Rising “tolls” support dividend and corporate growth

Because Enbridge has already built its infrastructure, the pipelines require virtually no maintenance, so the “tolls” come back to us in the form of dividends or fuel company growth through acquisitions, which then increases the dividend!

Put it all together and we have three key sources of payment rise and growth here. First, the upcoming rate “refinancing”: As interest rates fall in 2024, high-yielding securities like ENB will attract many investors who will be “shaken” by Treasuries and other investments so-called “safe”. Enbridge’s borrowing costs will also decrease: in fact, the company forecasts a decrease of $4.1 million in this column in 2024.

Second, we can expect gasoline prices to rise further as the natty moves closer to around $3.60, on average over the past five years. Finally, there is this series of payment increases, which have continued despite the burning of tires in the early 2020s.

Yet despite all this, Enbridge’s stock price has fallen far behind its dividend, which has more than doubled over the last 10 years:

Now, I know this dividend growth chart may seem unusual, so let me clarify a few things:

1. Enbridge’s “dividend magnet” will be due: If you’ve read my columns, you know that dividend growth is the main driver of stock prices: where the dividend goes, the stock price follows. So when a gap like the one above opens, it’s a buying opportunity.
2. This 19% loss is misleading because it is on a price basis. Consider ENB’s high dividend, something like Yahoo Finance and Google Finance. not do – and you see that shareholders have enjoyed a 39% return during that time.
3. The change distorts the situation: The only reason the orange “dividends” line above isn’t a nice staircase is that ENB pays its dividends in Canadian dollars. More on this below.

Plus, this dividend is well covered: currently, Enbridge pays out 65% of distributable cash flow as dividends, which is good since its infrastructure is built. It’s a cash cow.

He expects this ratio to remain the same next year and forecasts distributable cash flow (DCF) of $5.40 to $5.80 for 2024, the midpoint of which is up 3% per year. compared to a year ago. And management has blind aim when it comes to following guidelines, regardless of the car crashes the economy causes (gray areas below):

Let’s end with the currency tailwind that we mentioned a second ago. Now that the Fed is done with its rate hikes, currency traders will look to the future. As the greenback falls with rates, that will give a boost to Enbridge, which reports its profits in Canadian dollars. This is yet another catalyst for this off-the-radar (for now) “pseudo-utility” paying at 7.7%.

Brett Owens is chief investment strategist for Contrarian perspectives. For more great income ideas, get your free copy of his latest special report: Your early retirement portfolio: huge dividends, every month, forever.

Disclosure: none