Enbridge (TSX:ENB) and TC Energy (TSX:TRP) are major players in the North American energy infrastructure industry. Their share prices have fallen considerably this year, and the stocks now offer attractive dividend yields. Investors seeking passive income are wondering if ENB stock or TRP stock is now undervalued and good to buy for a self-directed portfolio.
Enbridge
Enbridge is down about 17% in 2023. The stock has been on a steady decline through most of the year, largely due to rising interest rates rather than issues specific to the company’s operations.
Enbridge uses debt as part of its funding for growth initiatives, including the $17 billion capital program and acquisitions. Rising interest rates make debt more expensive. This cuts into profits and can reduce cash that is available for distribution to shareholders.
Enbridge, however, is buying businesses and building new assets to drive revenue and cash flow growth in the coming years. The latest announcement is the US$14 billion acquisition of three natural gas utilities in the United States. When combined with the existing natural gas utility business in Canada, the division will be the largest natural gas utility operator in North America. These businesses generate reliable rate-regulated revenue by distributing an essential fuel to millions of homes and businesses.
In the past two years, Enbridge has also made investments to benefit from rising global demand for Canadian and American oil and natural gas. Enbridge purchased an oil export terminal in Texas and is a partner in the Woodfibre liquified natural gas (LNG) export facility being built on the coast of British Columbia. In addition, Enbridge is betting on solar and wind expansion through its acquisition last year of a renewable energy project developer.
Enbridge increased the dividend in each of the past 28 years. Investors can now get a yield of 8% from ENB stock.
TC Energy
TC Energy just announced that its 670 km Coastal GasLink pipeline is complete. The asset will transport natural gas from producers to the new LNG Canada facility that is also being built in British Columbia. Shipments are scheduled to begin in 2025.
Coastal GasLink’s costs ballooned from an initial budget of around $6 billion to more than $14 billion as of the latest update. This is part of the reason TC Energy’s share price is down 20% over the past 12 months. Rising interest rates have also hurt the stock.
TC Energy is monetizing some assets to get money to shore up the balance sheet and fund the rest of the $34 billion capital program. The company raised $5.3 billion earlier this year through the sale of an interest in some of its American assets. TC Energy is also planning to spin off its oil pipelines business into a new company and is evaluating the potential sale of other assets, including its holdings in Mexico.
Despite the headwinds, TC Energy still expects the new assets to generate adequate revenue and cash flow growth to support planned annual dividend increases of 3-5%. TC Energy has increased the distribution annually for more than two decades. At the time of writing, investors can get a 7.9% dividend yield.
Is one a better pick?
Enbridge and TC Energy pay attractive dividends that should continue to grow.
Enbridge’s growing utility and renewable energy businesses make the revenue stream more diversified, although the oil pipelines and natural gas transmission assets remain the core operations.
TC Energy is in a transition phase with its plans to monetize billions more in assets. The stock might remain under pressure until there is better clarity on how that will proceed, but TRP likely has better upside torque on a rebound if asset sales go well.
If you only buy one, I would probably make Enbridge the first choice today and maybe look to add TC Energy later.
