The market correction that occurred over the past year hit TSX energy stocks and bank stocks quite hard. Enbridge (TSX:ENB) and Bank of Montreal (TSX:BMO) are down from their 2022 highs, and investors who missed the big rally off the 2020 crash are wondering if ENB stock or BMO stock is now undervalued and good to buy for a portfolio focused on passive income.
Enbridge
Enbridge raised its dividend in each of the past 28 years, and more gains should be on the way. The company is working on a $17 billion capital program that will help drive revenue expansion. Growth could also come from acquisitions.
Enbridge is a giant in the North American energy infrastructure industry with a current market capitalization near $98 billion. The extensive oil pipeline infrastructure moves 30% of the oil produced in Canada and the United States. Enbridge bought an oil export terminal for US$3 billion in in 2021 to broaden its service offerings in the segment.
On the natural gas side of the business, the transmission network moves about 20% of the natural gas used in the United States. At home, Enbridge’s natural gas utilities provide millions of Canadian homes and commercial clients with fuel.
Looking ahead, Enbridge is expanding its renewable energy assets in North America and Europe. The company acquired a renewable energy project developer in the U.S. last year and recently announced another large offshore wind farm development in France.
Management expects adjusted earnings per share (EPS) to increase by 4% per year through 2025 and by about 5% annually afterwards. Distributable cash flow (DCF) should grow annually by at least 3%.
As a result, investors should see steady dividend growth in the 3% range over the next few years.
Enbridge stock trades near $48.50 at the time of writing compared to more than $59 at the peak last year. Investors who buy the dip can get a 7.3% dividend yield right now.
Bank of Montreal
Bank of Montreal paid its first dividend in 1829 and has given investors a slice of the profits every year since that time. This is a solid performance considering all the economic downturns and market crashes that have occurred over the past two centuries.
Bank of Montreal closed a major acquisition in the United States in early February this year. The US$16.3 billion purchase of Bank of the West added more than 500 branches and gives BMO Harris Bank, the U.S. subsidiary, a strong foothold in the California market. Investors should see long-term benefits from the deal, but the plunge in the share prices of U.S. regional banks in March this year, and the continued weakness in bank stocks has investors concerned that Bank of Montreal might have paid too much for the acquisition.
Bank of Montreal reported solid fiscal second-quarter (Q2) 2023 results. Adjusted net income was actually slightly higher than in fiscal Q2 2022. The sharp rise in interest rates over the past year is expected to result in higher loan defaults. Bank of Montreal reported an adjusted provision for credit losses (PCL) of $318 million in the quarter compared to $50 million in the same period last year.
Investors need to keep an eye on the PCL number in the coming quarters, but Bank of Montreal has a solid capital position to ride out some economic turbulence. The common equity tier-one (CET1) ratio at the end of fiscal Q2 2023 was 12.2%. Regulators recently announced an increase to the required CET1 ratio from 11% to 11.5%.
Bank of Montreal raised its quarterly dividend to $1.47 from $1.43 when the bank announced the fiscal Q2 results. This would suggest the management team is comfortable with the revenue and earnings outlook.
BMO stock trades near $117.50 at the time of writing compared to more than $150 in March 2022. Investors can now get a 5% dividend yield.
Is one a better pick today?
Enbridge and Bank of Montreal pay attractive dividends that should continue to grow.
At this point, I would probably make Enbridge the first choice for a portfolio focused on passive income. The yield is higher, and the stock appears oversold. BMO should be an attractive long-term pick today, but investors should anticipate more volatility, as interest rates continue to rise.
