Enbridge's Earnings Slipped Last Quarter. Its Dividend Didn't. Here's What to Watch.

Share prices of Enbridge (NYSE: ENB) have slipped more than 15% over the past three months since the midstream energy company reported that second-quarter adjusted earnings per share (EPS) had fallen 3% year over year to $0.63.

Normally, that might be a legitimate cause for concern, but in this case, it's a dramatic overreaction that investors can exploit.

Here are three reasons Enbridge remains a buy, despite its recent stock slump.

Image source: Getty Images.

1. Its distributable cash flow continues to rise

Enbridge, based in Canada, is the largest natural gas utility in North America, delivering 9.3 billion cubic feet of natural gas per day to about 7.2 million customers across Canada and the United States. Despite several ongoing capital expenditures the company has made that are expected to pay off in the coming years, Enbridge continues to grow its distributable cash flow (DCF).

In the second quarter, it reported DCF of CA$2.948 billion, up 1.5%, year over year. DCF is the most critical financial performance metric for pipeline companies such as Enbridge.

Unlike standard manufacturing or tech firms, for which net income or EPS are more crucial, midstream operations are capital-intensive asset businesses driven by recurring cash generation rather than net income.

Pipeline assets involve billions in upfront capital expenditures that depreciate over decades. Net income calculated under generally accepted accounting principles (GAAP) deducts this heavy depreciation, which distorts the operational cash flow. DCF starts with earnings before interest, taxes, depreciation, and amortization (EBITDA), or cash flow from operations, and adjusts for noncash items to show the actual cash available to return to unitholders or shareholders.

Its dividend continues to deliver

Enbridge is the largest natural gas utility by volume in North America. Roughly 98% of its cash flow is bolstered by long-term, rate-regulated contracts with built-in inflation adjustments. The company has said it intends to maintain its DCF payout range of 60% to 70% to keep the dividend safe.

The dividend yield, at its current share price, is more than 5 times the S&P 500 average at 5.81%. The company increased its dividend by 3% this year, the 31st consecutive year it has raised its dividend.

Another number to consider

Thanks to expenditures for new projects, the company's debt-to-EBITDA level has increased to 6.33x, the highest it has been in three years.

While that level of debt may worry some investors, it's important to note that analysts expect the additional spending to pay off, and Enbridge's CA$41 billion in new energy infrastructure projects is likely to drive long-term EBITDA growth.

The project backlog spans gas transmission, liquid natural gas connections, distribution expansions, and renewable infrastructure. The company sees these projects growing adjusted EBITDA and DCF by 5% each annually through the end of the decade.

Supplying a crucial need

Betting on Enbridge isn't exactly risky, considering the company's long-term contracts and steady cash flows. The company is predicting yearly adjusted EBITDA between CA$20.2 billion and CA$20.8 billion this year, up from CA$19.9 billion in 2025.

The growth of data centers and rising electrification needs are driving demand for additional energy sources. Enbridge's balanced blend of energy sources positions it to benefit regardless of which energy type is favored in a given year. The stock's decline so far this year just makes a good stock more affordable.

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