Enbridge (TSX:ENB) and BCE (TSX:BCE) are trading at big discounts to the highs they reached in 2022. Contrarian investors who missed the rallies off the 2020 market crash are wondering if ENB stock or BCE stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio focused on passive income.
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Enbridge
Enbridge is a giant in the North American energy infrastructure sector with a current market capitalization near $100 billion. Growth comes from internal development projects and strategic acquisitions.
The latest deal is the US$14 billion purchase of three American natural gas utilities. Enbridge already has natural gas utilities in Canada that serve millions of commercial and residential customers, so it has experience in the segment. The purchases are part of Enbridge’s strategy to diversify its revenue stream and position the business to benefit from the anticipated transition to hydrogen fuel and renewable energy.
Enbridge’s existing natural gas transmission infrastructure already carries 20% of the natural gas used in the United States and the company is building new pipelines to connect to liquified natural gas (LNG) terminals on the Gulf of Mexico. In Canada, Enbridge is a partner on the Woodfibre LNG export project that is expected to be in service in 2027.
The core oil pipelines and oil export business remain important. At the same time, Enbridge is making sure it participates in the growth of renewable energy. The company purchased a wind and solar developer last year to boost the existing renewables assets.
Enbridge trades near $47 per share at the time of writing compared to $56 in January.
The drop is largely due to rising interest rates that make debt more expensive. As funding costs increase, some projects might not be viable, and profits can slide. At this point, the pullback appears overdone.
Enbridge expects to deliver revenue and distributable cash flow growth in the coming years. This should support ongoing dividend increases. Enbridge raised the payout in each of the past 28 years.
At the time of writing, ENB stock offers a 7.5% dividend yield.
BCE
BCE is the largest communications company on the TSX with a current market capitalization near $50 billion.
The stock trades below $55 at the time of writing compared to $65 in May this year. The steep decline has occurred as a result of renewed rate hikes by the Bank of Canada, as the central bank tries to slow down the economy to get inflation back to its 2% target. The August 2023 inflation report came in at 4%, so there is still a risk of additional rate increases.
Despite the headwinds, BCE expects to deliver solid results in 2023. The core mobile and internet subscription businesses are performing well and will help offset challenges in the media group, where advertising revenues are falling in the legacy television and radio segments.
BCE confirmed guidance for revenue and free cash flow growth in 2023 when it reported the second-quarter 2023 results. This should support another dividend increase for 2024. BCE raised the dividend by at least 5% in each of the past 15 years.
At the current share price, BCE stock offers a 7% dividend yield.
Is one a better pick?
Enbridge provides a higher yield right now, while BCE could deliver slightly better dividend growth over the next few years. Both stocks look oversold at this point and should bounce as soon as interest rates begin to decline. At the current prices, I would probably split a new investment between ENB and BCE.
