Enbridge's Profit Just Fell 7%. Here's Why That's Not the Real Story.

Midstream operator Enbridge (NYSE: ENB) reported earnings on July 31, and its stock has tumbled more than 7% since. The reason was obvious. The company's profit margin narrowed because its heavy debt load is weighing on net earnings.

Enbridge reported earnings per share (EPS) of CA$0.64, down 36% year over year, and the company's total leverage is around 5.1x debt to earnings before interest, taxes, depreciation, and amortization (EBITDA). That's a legitimate concern, even for a company with steady cash flows such as Enbridge. It's important to realize, though, that much of that is from the costs of new energy infrastructure projects that will lead to long-term revenue growth.

Here are three reasons why Enbridge remains a buy.

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Its above-average dividend appears safe

The energy and utility infrastructure company, based in Canada, operates the largest natural gas utility by volume in North America and has more than 18,000 miles of active crude pipeline. Its natural gas transmission and midstream network stretches for about 19,373 miles. It moves about 30% of the crude oil produced in North America and transports nearly 20% of the natural gas consumed in the U.S. It is also a growing player in renewable energy, with solar and wind power operations.

Enbridge continues to grow distributable cash flow (DCF), which powers its above-average dividend, yielding 5.41% at its current share price. In the second quarter, DCF was CA$2.9 billion, up 35.2% year over year.

The company has increased its quarterly dividend for 31 consecutive years, including a 3% increase in December. Enbridge has a low-risk, utility-like business model in which 98% of its cash flow is generated by long-term, inflation-protected, rate-regulated contracts, making it a strong choice for income-oriented investors. The company has said it intends to maintain a DCF payout range of 60% to 70% to keep the dividend safe.

Enbridge is spending now to cash in later

Enbridge has sanctioned up to CA$20 billion in projects to drive revenue and earnings growth through the end of the decade, including projects made to order for hyperscalers, data centers, and other pipeline expansions. The company has a growing relationship with Meta (NASDAQ: META), with four projects involving solar, wind, and battery-storage development.

Enbridge has a secured capital backlog of CA$41 billion and has approved approximately CA$9 billion of projects this year. It has diversified its planned projects across liquid pipelines, gas transmission lines, gas distribution and storage facilities, and renewable projects, including solar energy. That gives it a balance that allows it to prosper, regardless of which way energy spending grows.

The company has shown the ability to adapt

Once primarily a crude oil pipeline operator, the company has adopted a more balanced approach, allowing it to succeed in all market cycles. It now has a portfolio of oil, natural gas, and renewable power assets, enabling it to transition from higher-emission energy sources to natural gas, renewable energy, and lower-carbon solutions.

By acquiring Dominion Energy's gas utilities (East Ohio Gas, Questar Gas, PSNC) in 2023, Enbridge established North America's largest natural gas utility platform by volume, serving more than 7 million customers. Its gas utilities and gas transmission assets generate steady, rate-regulated returns that insulate Enbridge from commodity price swings and offset volume risks in oil transportation.

That's why it can safely stay with its yearly guidance, even in the midst of major projects. Enbridge says it plans to have a yearly DCF between $20.2 billion and $20.8 billion and an annual DCF per share between $5.70 and $6.10.

Taking on debt can be scary, but Enbridge has customers lined up for these projects, and the extra spending will enable it to grow EBITDA and DCF, while maintaining its attractive dividend.

James Halley has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge and Meta Platforms. The Motley Fool has a disclosure policy.