BCE (TSX:BCE) and Enbridge (TSX:ENB) are leaders in their respective industries with strong businesses that generate reliable cash flow. The market correction hitting the communications and energy infrastructure sectors has investors wondering if BCE stock or ENB stock is now undervalued and good to buy for a portfolio focused on passive income.
BCE
BCE trades below $58 per share at the time of writing compared to more than $70 at the high point last year.
The drop is due to a combination of recession fears, rising interest rates, and weaker revenue in the media business.
BCE gets most of its revenue from mobile and internet subscription services. These tend to be essential for homes and businesses to function, so they should hold up well during a recession. Other parts of the business, however, could see revenues decline as people shift money away from discretionary items to cover increased food and mortgage expenses. Streaming subscriptions could get axed and people might decide to skip an upgrade to a new phone.
Businesses are already feeling the pinch and have started cutting back ad spending. This led BCE to recently reducing staff in its media group and closing a number of radio stations.
Rising interest rates are making debt more expensive for companies that have large capital programs. BCE spent roughly $5 billion in 2022 on projects, including the expansion of the 5G network. The firm uses debt to fund part of its investment initiatives, so the increased expenses can reduce cash available for distributions.
Headwinds are expected to persist in the coming quarters, but BCE is likely oversold at this level. Management expects overall revenue to rise in 2023 compared to last year. Free cash flow is also predicted to be higher. That should support a decent dividend increase for 2024.
BCE raised the payout by at least 5% annually over the past 15 years. Investors who buy at the current level can get a 6.7% dividend yield.
Enbridge
Enbridge has given investors a dividend increase every year for nearly three decades. The pipeline giant continues to find strategic acquisitions and capital projects to boost growth. Recent investments include the purchase of an oil export terminal in Texas, the acquisition of a renewable energy developer in the United States, and the purchase of a 30% interest in the development of a new liquified natural gas (LNG) facility being built in British Columbia. In addtion, Enbridge is working through a $17 billion capital program.
Management expects adjusted earnings per share (EPS) and distributable cash flow (DCF) to increase by 4% and 3%, respectively, through 2025, and by 5% afterwards. This should support ongoing dividend hikes.
ENB stock trades near $48.50 at the time of writing compared to $59 at one point last year. Investors can now get a 7.3% dividend yield.
Is one a better pick?
BCE and Enbridge both look oversold and pay attractive dividends that should continue to grow. Enbridge offers the higher yield right now, so investors seeking passive income might want to make it the first choice.
I would probably split a new investment between the two stocks at the current share prices.
