Wide-moat 
Enbridge (ENB) held its 2018 investor day and announced a 10% dividend increase, as expected. On an annualized basis, the 2019 dividend stands at $2.95 per share, representing a 6.8% yield. Many investors feared that Enbridge wouldn’t be able to meet its targeted increase, but we feel comfortable that the company can make its payments with its distributable cash flow coverage of 1.65 times the dividend payments.
Enbridge announced a 2019 outlook that included adjusted EBITDA of $13 billion and distributable cash flow of $8.9 billion. Both targets are in line with our expectations. The company continues to expect Line 3 to be placed into service in the back half of 2019, slightly ahead of our first-quarter 2020 expectations. Construction is 80% complete in Canada, and Enbridge expects it to be fully completed by July 2019. Enbridge is also continuing its negotiations on the Mainline tolling agreement but did not give a detailed update due to ongoing discussions with shippers. The existing agreement expires in 2021, but Enbridge is using the current uncertainty associated with future egress to lock in future cash flows on the Mainline.
We are maintaining our $62 fair value estimate and wide moat rating. Our long-term thesis is intact, and we see tremendous upside in the stock. We expect Enbridge to easily meet its 10% average annual dividend growth target through 2020 while maintaining healthy distributable cash flow. We consider Enbridge a rare triple threat, boasting a wide moat, an attractive 6.8% dividend yield, and a cheap valuation. We think the time is right for long-term investors to capitalize on the stock’s considerable upside while collecting a steady stream of growing income.
Enbridge’s Line 3 replacement project would restore Line 3 to its initial capacity of 760,000 barrels per day, adding 370 mb/d of new pipeline capacity. Similar to other mainline routes, the Line 3 replacement will be a common-carrier pipeline. The pipeline is expected to originate in Hardisty, Alberta, and connect to the United States in Minnesota, where it will connect to other U.S. pipelines. It will provide additional access to refineries in eastern Canada, Cushing, Oklahoma, the U.S. Midwest, and the U.S. Gulf Coast at an expected cost of US$7.5 billion. Shipments on the expanded Line 3 can displace feedstock in eastern Canada, but most important, capitalize on the heavy oil refining capacity in the U.S. Gulf Coast while ensuring stability of crude receipts for Minnesota refineries. Construction has already begun on the Canadian portion of the pipeline expansion, while construction on the Minnesota portion is not expected to begin until early 2019.
We think Enbridge can meet its targeted annual dividend growth of 10% through 2020. We expect the growth portfolio to generate almost $4 billion in incremental EBITDA, which will support the dividend growth with a healthy distributable cash flow ratio of 1.3 times the forward dividend--more than enough buffer.
Enbridge remains our top pick in the energy sector. With the shares trading at about $43, we see more than 40% upside. We think investors are overlooking Enbridge’s big picture and are too narrowly focused on the company as a dividend stock. Because of this, we think they are overlooking cash flows from the growth portfolio, especially the Line 3 replacement project and the numerous natural gas projects. Combined, we expect these projects to generate $4 billion in incremental EBITDA to fuel dividend growth while improving the balance sheet from current levels.
