7 Core Growth Stocks for Your Portfolio - Enbridge
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Investors can prime their portfolio for success by building on a collection of core growth stocks. These are wonderful businesses with both a sustainable competitive advantage and a long growth runway. Enbridge (NYSE: ENB) is one of the few companies that meet both of those requirements.
Why it's a core stock
Enbridge moves energy. These are the guys who ship energy from the wellhead to the refinery and into your home. The company operates Canada's largest transportation network with over 15,000 miles in pipelines and is responsible for exporting two thirds of Western Canada's crude oil production.
But what was once a stable industry is now in the midst of a major expansion. According to the IEA, North American energy production is expected to grow by 3.9 million barrels per day (b/d) between 2012 and 2018. The surprise upswing is the result of double-digit growth from the Alberta oil sands, North Dakota Bakken, and Texas Eagle Ford.
But here's the problem: There isn't enough pipe to move all of this oil from wellhead to market. Across the continent, oil is log-jammed at terminals and the situation is getting worse.
Enbridge is the solution to this problem. Over the next four years the company has secured $28 billion in new expansion projects and is projected to grow earnings 10% annually into the later part of the decade. This is a secular trend that won't disappear the next time congress debates the debt ceiling or a sour European debt auction roils the markets.
But the real benefit of investing in a pipeline company like Enbridge are the tall barriers to enter the business. Once you have a pipe in the ground you essentially have a monopoly. This is a highly regulated industry which makes it prohibitively expensive for new competitors to enter the market.
This means two thing for shareholders: big returns and juicy dividends. Enbridge has paid a dividend for 60 consecutive years and has grown its payout 12.3% annually over the last decade.
Risks to watch out for
Of course as with any good investment, there's always a number of risks that investors have to be on the look out for.
Politics: Political gridlock is a huge obstacle to the industry's growth. TransCanada's (NYSE: TRP) Keystone XL pipeline illustrates this problem perfectly. If approved, Keystone would transport 830,000 b/d of Alberta crude oil to refineries on the Gulf coast. However, the project faces stiff resistance from environmentalists and Keystone still requires approval from the U.S. State Department.
But recently we've seen encouraging signs. In June, U.S. President Barack Obama declared that he would reject any project that has a 'net' negative effect on the environment. Many analysts see this as a 'wink and a nod' to the industry that Keystone will be approved. This is good news for all pipeline companies.
Competition: While pipelines have struggled to get approval, rail is picking up the slack. Canadian National Railroad (NYSE: CNI) has been a big beneficiary of this trend. Analysts predict that the company will ship 110,000 b/d this year. By 2015, that figure could grow to 300,000 b/d accounting for 7%-8% of the company's revenues.
Interest Rates: Yes, the biggest threat to a pipeline company isn't politics or oil spills, it's rising interest rates. Pipeline stocks have benefited handsomely as yield starved investors switch out of low paying bonds and into safe, dividend paying stocks. But in the past six months, the yield on 30- year U.S. Treasury bonds have increased from 2.5% to 3.6%. This makes holding risky equities like Enbridge less attractive.
Foolish bottom line
Enbridge is a company that combines exceptional growth with exceptional pricing power. That's why it belong as a core holding in your portfolio.
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Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!