After a strong rally in 2022, energy infrastructure stocks have been in the red, as the pressure of rising interest rates increased their debt burden. And the news of a spinoff by one of the largest pipeline companies TC Energy (TSX: TRP) affected other pipeline stocks. While TC Energy stock fell 13%, Enbridge (TSX: ENB) and Pembina Pipeline (TSX: PPL) fell 3% and 2.6%, respectively.
It has created a once-in-a-decade opportunity to buy these high-yielding dividend stocks at their new lows. All three companies have a robust business model of building pipelines and collecting toll money for transmitting oil and natural gas.
Why is TC Energy stock a screaming buy in August?
TC Energy shocked the market by announcing plans to create two separate companies for gas and oil pipelines and unlock shareholder value. Oil stocks are cyclical as they move alongside oil prices. Natural gas stocks are seasonal and surge when the temperature drops as natural gas is used for heating homes.
Pipeline companies have been transitioning from oil to gas pipelines for several years, but none considered a spin-off. TC Energy has been facing issues with two of its projects; cost overruns at the Coastal GasLink project and oil leaks at the Keystone Pipeline project. The spinoff will help the company enhance the efficiency of oil pipelines and expand gas pipelines, thereby unlocking value.
But TC Energy shareholders have reacted to the spinoff rather bearishly as they will have to hold two stocks to get the same dividend amount. But the dip has inflated its yield to 7.8%, creating an opportunity to lock in a higher yield and partially offset any slowdown in dividend growth from the spinoff.
Why is Enbridge stock a screaming buy in August?
Unlike TC Energy, Enbridge did not face any significant cost overruns on a project. Enbridge also has a lower leverage ratio of 4.6 times compared to TC Energy’s 5.4 times. The leverage ratio shows that TC Energy’s debt is 5.4 times its earnings before interest, taxes, depreciation, and amortization (EBITDA). Enbridge has better fundamentals due to lower debt.
Things are working well for Enbridge, which makes it unlikely for the company to consider a spinoff. It pays out 60-70% of distributable cash flows (DCF) as dividends and keeps the remaining in reserve for future usage. It slowed its dividend growth to 3% after the pandemic to keep the dividend in sync with its policy (it determined 2023 dividends based on the 2022 DCF). As 2022 and 2023 saw strong growth in oil and gas volumes, Enbridge saw higher profits, which it used to fund its gas pipelines, as it looks to tap North America’s liquefied natural gas (LNG) export opportunity.
TC Energy’s over-budget Coastal GasLink pipeline significantly increased its payout ratio. It doesn’t want to break its 23-year record of dividend growth. Hence it decided to split the business and focus on deleveraging (oil pipeline company) and growth (gas pipeline company) together.
The dip in Enbridge stock has created an opportunity to buy the stock below $50 and lock in a 7.4% yield.
Why is Pembina Pipeline stock a screaming buy in August?
Like Enbridge, Pembina Pipeline has better fundamentals than TC Energy. Pembina’s leverage ratio is 3.6 times, and its dividend-payout ratio is 57%. While it doesn’t have +20 years of dividend-growth history like the above two, it is a good dividend payer. Until last year, Pembina paid a monthly dividend but changed the frequency to quarterly in 2023. It has grown its dividend in 10 out of 11 years at a compounded annual growth rate of 5%.
Pembina stock is trading closer to its 52-week low, creating an opportunity to lock in a 6.5% yield.
Summing up
| Stock | Stock Price | Dividend/share | Number of Shares | Annual Dividend |
| TRP | $47.80 | $3.72 | 42 | $156.24 |
| ENB | $48.09 | $3.55 | 41 | $145.55 |
| PPL | $40.78 | $2.01 | 49 | $98.49 |
| Total | $400.28 |
If you invest $2,000 in each of the three stocks now, you can earn $400 in annual dividends in the next four quarters (excluding dividend growth).
