Enbridge (TSX:ENB) started attracting bargain hunters in recent weeks after a steady decline pushed the share price to lows not seen since early 2021. Investors who missed the bounce are wondering if ENB stock is still oversold and good to buy for a self-directed portfolio focused on passive income and total returns.
ENB stock
Enbridge trades near $47.50 at the time of writing compared to $43 in October. The rebound is good news for long-term investors, but the stock is still way off the $59 it reached last year.
Rising interest rates are the main reason for the decline. Enbridge uses debt as part of the funding for its growth strategy, so higher borrowing costs can hurt profits. The Bank of Canada and the U.S. Federal Reserve have increased rates over the past 18 months in an effort to get high inflation under control. The moves appear to be working. Inflation for October was 3.1% in Canada and 3.2% south of the border. This is still above the 2% target, but it is moving in the right direction.
Bond markets are starting to price in rate cuts next year. Investors seem to be of the opinion that the central banks will ease up as inflation continues to fall. There is a risk that the rate hikes have already been too aggressive and the economy could enter a recession. This could force a reduction in interest rates to stimulate economic activity.
The change in sentiment on the rate front over the past eight weeks is one reason ENB stock has started to recover.
Earnings
Enbridge generated solid results through the first nine months of 2023 and the company expects to deliver revenue and cash flow growth next year. Earnings before interest, taxes, depreciation, and amortization (EBITDA) should rise by 4% and distributable cash flow (DCF) by 3% compared to the midpoint guidance in 2023.
Enbridge put $3 billion in capital projects into service in 2023 that will generate new revenue next year. During the year Enbridge added $7 billion in projects to the capital plan, boosting the backlog to $25 billion. Accretive tuck-in acquisitions valued at $3 billion are also expected to help boost cash flow.
Looking ahead, Enbridge recently announced a US$14 billion deal to buy three natural gas utilities in the United States. The acquisitions are expected to close in 2024. At the time of the third quarter (Q3) of 2023 earnings release the company had already secured 75% of the required financing for the deals. Assuming the acquisitions are completed as planned, there should be good news for investors heading into 2025.
Dividends
Enbridge just announced a 3.1% dividend increase for 2024. The decision is a relief for investors who wondered if another hike would be on the way given the negative impact of higher borrowing costs and the steep decline in the share price over the past year.
The dividend increase extends the streak to 29 consecutive years. That’s the kind of reliability investors want to see when searching for top TSX dividend stocks to buy for passive income.
At the time of writing, ENB stock provides a 7.7% dividend yield.
Is Enbridge still a good buy?
Ongoing volatility should be expected until the central banks confirm they are done raising interest rates. That being said, the downside risk should be limited at this point, and investors get paid well to ride out any additional turbulence.
If you have some cash to put to work in a portfolio focused on dividends Enbridge still looks cheap right now and deserves to be on your radar.
