Enbridge (TSX:ENB) is down more than 20% from the 2022 high. Contrarian investors seeking reliable high-yield dividend stocks are wondering if ENB stock is now undervalued and good to buy for self-directed Tax-Free Savings Account (TFSA) focused on passive income or a Registered Retirement Savings Plan (RRSP) focused on total returns.
Enbridge trades for close to $46 per share at the time of writing. The stock was as high as $59 at the peak last year.
The surge in interest rates in Canada and the United States is driving up borrowing costs for companies like Enbridge that use debt to finance their growth projects. Enbridge has a $24 billion secured capital program on the go and has been very active in making acquisitions in the past few years. The jump in debt expenses can hit earnings and reduce the cash that is available for distribution to shareholders.
At the same time, dividend stocks have to compete with no-risk alternatives for investor funds. In the past decade, the rate paid on a Guaranteed Investment Certificate (GIC) was horrible. That has changed in the past 18 months, and investors who seek passive income can now get more than 5% on insured non-cashable GICs. Shares of Enbridge and other top TSX dividend stocks have come down as interest rates increased. As the share price falls, the dividend yield goes up. The point where the stock finds balance is often at the yield investors think is reasonable for the added risk.
At the current share price, ENB stock provides a 7.75% dividend yield. The board has increased the payout for 28 consecutive years.
Enbridge is on track to meet its 2023 financial guidance. The third-quarter results came in largely in line with the same period last year, and the performance has been solid through the first nine months of 2023. As such, the bulk of the decline in the share price is probably due to the impact of interest rate hikes rather than operational issues.
Looking ahead, Enbridge’s recent string of acquisitions should drive revenue and cash flow growth. Enbridge is spending US$14 billion to buy three natural gas utilities in the United States. These businesses generate reliable rate-regulated cash flow. Enbridge is also targeting export opportunities. The company spent US$3 billion in 2021 to buy an oil export terminal in Texas and is a partner on the Woodfibre liquified natural gas (LNG) export site being built in British Columbia.
Solar and wind assets are also part of the mix, and the renewable energy group should grow in the coming years.
Is Enbridge a buy today?
Volatility should be expected until there is clear evidence that the Bank of Canada and the U.S. Federal Reserve are done raising interest rates. However, Enbridge already looks cheap, and you get paid well to ride out any additional turbulence. If you have some cash to put to work, ENB stock deserves to be on your radar.