Enbridge (TSX:ENB) continues its 2023 correction. The share price is down about 19% this year and recently hit a low not seen since early 2021. Contrarian investors are wondering if Enbridge stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) targeting passive income or a Registered Retirement Savings Plan (RRSP) focused on total returns.
Why Enbridge stock is down so much
Enbridge trades below $43.50 per share at the time of writing compared to a 2023 high of around $56.
Soaring interest rates are mostly to blame for the drop in the share price. Investors always require a risk premium on top dividend stocks compared to the risk-free rate they can get on alternative investments. With Guaranteed Investment Certificate (GIC) rates now topping 5.5% for some terms, investors might be shifting funds out of top dividend stocks like Enbridge. As the share price falls, the dividend yield increases.
High interest rates also increase borrowing costs. Enbridge uses debt to fund part of its growth projects, so the increase in debt expenses can reduce cash available for distributions and put pressure on profits. Enbridge has a current capital program of around $17 billion. The company is also making acquisitions.
Is Enbridge’s dividend safe?
At the time of writing, Enbridge offers a dividend yield of more than 8%. That’s pretty high, and it is getting into a range where the market might be signalling expectations for a cut.
This is certainly possible but unlikely. Enbridge’s capital program and acquisitions are expected to drive steady revenue and cash flow growth in the next few years. The recently announced US$14 billion deal to buy three natural gas utilities in the United States will diversify the revenue stream and add reliable rate-regulated cash flow that should be steady in all economic conditions.
Demand for oil and natural gas is expected to remain robust for decades, even as the world transitions to renewable energy. Enbridge’s existing oil and natural gas transmission networks are vital to the smooth operation of the Canadian and U.S. economies. The export facilities, both in place and under construction, enable Enbridge to benefit from growing international demand for North American oil and natural gas.
Enbridge is also expanding its renewable energy portfolio to tap the growth demand for solar and wind projects in the United States and Europe.
Is Enbridge stock a buy?
Additional downside is possible if the Bank of Canada and the United States Federal Reserve continue to raise interest rates. The end of the rate hikes, however, should be on the horizon, and Enbridge’s share price could rebound sharply when the central banks indicate they are done fighting inflation.
At the current share price, Enbridge already looks oversold. It is tough to ignore a yield of 8%. Investors get paid well to ride out some volatility and could get rewarded with decent capital gains in the coming years. If you have some cash to put to work, Enbridge deserves to be on your radar.
