Pensioners seeking passive income and retirement investors targeting total returns are wondering if Enbridge (TSX:ENB) is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
Energy market outlook
The price of West Texas Intermediate (WTI) oil is moving higher after the pullback that followed the 2022 surge. At the time of writing, WTI trades near US$78.50 per barrel compared to less than US$70 a month ago. Oil traded above US$120 at the peak last year.
For most of the past 12 months, the bears have had the upper hand, driven by recession fears. Central banks are aggressively raising interest rates in an effort to bring inflation under control by cooling off a hot economy and bringing jobs markets back into balance. A steep economic decline would likely put pressure on fuel demand, and this is why traders have pushed down oil prices, despite efforts by OPEC+ to prop up the market through supply reductions.
The rally over the past month is an indication that market players are starting to believe in the soft landing outlook for the global economy. Inflation is dropping in the United States and Canada, and consumers keep spending, despite the increase in borrowing costs and higher prices for food and other essentials.
Traders are also positioning for a potential stimulus package in China. The Chinese economy has not recovered after the termination of the pandemic lockdowns, and unemployment among young people in the country is getting high. China is a major buyer of oil, and efforts to turbocharge the economy will likely drive up fuel demand and prop up oil markets.
At the same time, airlines are reporting strong profits on a boom in travel demand, and orders for hundreds of new planes keep rolling in for airline manufacturers. Jet fuel consumption is expected to soar in the next few years, potentially giving oil prices an extra boost. On the ground, commuters are returning to offices by the millions. Many are taking their vehicles for the two or three days they need to go to see the boss instead of using public transport, as they did in the past when they had to make the trip every day.
Ongoing volatility in oil prices should be expected, but overall fuel demand should be robust in the next few years.
Enbridge outlook
Enbridge isn’t an oil or natural gas producer. It simply moves the commodities from production sites to storage locations, export facilities, utilities, or refineries and charges a fee for providing the service. Enbridge also operates natural gas distribution utilities and has a growing renewable energy group.
As long as fuel demand remains strong, Enbridge’s assets get used and generate cash flow.
The company is working on a $17 billion capital program that is expected to boost revenue and profits in the next few years. Additional growth could come from strategic acquisitions. Enbridge purchased an oil export terminal and acquired a renewable energy developer in the past couple of years. The company also bought a 30% stake in a new liquified natural gas (LNG) facility being built in British Columbia.
Management expects earnings per share to grow by 4% through 2025 and by 5% beyond the next couple of years. Distributable cash flow is expected to increase by 3% and then 5% over the same timeframe.
This should support ongoing dividend hikes. Enbridge has increased the payout in each of the past 28 years.
Enbridge stock price
Enbridge trades near $49.50 on the TSX at the time of writing. That’s down from more than $59 at the high in 2022.
At this level, ENB stock is starting to look oversold, and investors who buy at the current price can pick up a 7.2% dividend yield.
Should you buy ENB stock now?
Additional downside is certainly possible, but investors seeking passive income and decent total returns might want to get in while Enbridge is out of favour to secure the high yield. In the event ENB stock moves lower, the dip should probably be viewed as a good opportunity to add to the position.
