Enbridge (TSX:ENB) and TC Energy (TSX:TRP) are giants in the Canadian energy infrastructure industry. The stock prices are down considerably in the past year and contrarian investors seeking high dividend yields and potential big capital gains are wondering if ENB stock or TRP stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Enbridge
Enbridge trades near $46 per share at the time of writing. The stock was as high as $59 in June 2022.
The Bank of Canada and the U.S. Federal Reserve are largely to blame for the decline over the past year. As the central banks raise interest rates in their efforts to get inflation under control, they make borrowing more expensive for businesses that want to invest in capital projects or already have variable-rate loans.
Rising borrowing expenses can reduce profits and cut into funds available for dividends if cash flow doesn’t increase enough to offset the impact.
The latest leg to the downside in Enbridge’s share price is due to the announcement that Enbridge has agreed to acquire three natural gas utilities in the United States for $US14 billion, including the assumption of debt. The move signals a major pivot by management to natural gas, although Enbridge already has large natural gas utility operations in Canada and operates extensive natural gas pipeline networks.
Enbridge issued $4.6 billion in new stock at a steep discount to the market price to help pay for the purchase. That sent the share price lower. Investors might also be concerned about the near-term impact on the balance sheet due to the assumption of more debt, but the deals should be positive for investors over the long haul.
Enbridge increased its dividend in each of the past 28 years. Investors who buy ENB stock at the current price can get a 7.7% dividend yield.
TC Energy
TC Energy trades for close to $49 at the time of writing. It was above $70 at the high point last year. The core reason for the decline is similar to the cause of the drop in Enbridge’s share price. However, TC Energy has also had issues with a major project.
The Coastal GasLink pipeline is now more than 90% complete, but the total cost is now expected to be at least $14.5 billion. This is more than double the initial budget. Pandemic delays, soaring material and labour costs, bad weather, protests, and conflicts with contractors have all impaired the project.
Despite the headaches, TC Energy says it still expects to deliver annual dividend growth of 3-5%, driven by the $34 billion capital program. Management is making progress on raising cash to shore up the balance sheet. TC Energy sold a stake in some U.S. assets for $5.2 billion and plans to spin off the oil pipeline business.
Investors who buy TRP stock at the time of writing can get a 7.6% dividend yield.
Is one a better pick?
Enbridge and TC Energy offer similar dividend yields and will likely increase the distributions at a similar rate over the medium term. Both stocks appear oversold right now, so I would probably split a new investment between the two at their current share prices.
