Enbridge (TSX:ENB) has a great track record of dividend growth and offers an attractive dividend yield. Investors who missed the rally after the 2020 market crash are wondering if the pullback in the share price over the past year has made ENB stock undervalued again and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Enbridge is down about 12% over the past year. The stock trades near $47 at the time of writing compared to a low of around $43 in October but is still way off the June 2022 high of around $59.
A change in interest rates in Canada and the United States is the main reason for the decline over the past year. The Bank of Canada and the U.S. Federal Reserve increased rates considerably to try to cool down the hot economy and get inflation under control. The jump in borrowing costs has a negative on businesses like Enbridge that use debt as part of their financing for growth initiatives, including acquisitions and internal projects. Higher debt expenses hurt profits and reduce cash that can be distributed to shareholders.
Rising interest rates have also made fixed-income investments more attractive for investors seeking passive income. Investors can currently get 5% returns on some Guaranteed Investment Certificates (GICs), so funds might have flowed out of Enbridge in favour of safer alternatives to the point where the dividend yield rose enough to provide an acceptable risk premium.
The bounce in Enbridge’s share price in recent weeks has occurred as bond yields fell and GIC rates dropped.
Enbridge earnings outlook
Enbridge generated third-quarter (Q3) of 2023 adjusted earnings of $1.3 billion compared to $1.4 billion in the same period last year. Distributable cash flow (DCF) increased to $2.6 billion from $2.5 billion in Q3 2022. Management also reaffirmed the full-year 2023 guidance, so the company is performing well as it heads into 2024.
Enbridge continues to grow through acquisitions and development projects. The company recently announced a US$14 billion deal to buy three natural gas utilities in the United States. Enbridge already has 75% of the cash needed for the purchases. This provides good clarity for investors and limits the funding risks that could otherwise be an overhang on the stock. The deals are expected to close in 2024.
Enbridge also has a $25 billion capital program on the go that will drive ongoing revenue and cash flow expansion.
The combination of the solid 2023 performance and the outlook for DCF growth is good news for the dividend. In fact, Enbridge just announced a 3.1% increase in the distribution for 2024. That marks the 29th consecutive annual dividend hike from the company. At the time of writing, Enbridge provides a 7.7% dividend yield.
Is ENB stock good to buy today?
Ongoing volatility should be expected until there is clear evidence the central banks are done raising interest rates. Economists, however, are increasingly predicting rates will begin to decline in 2024. Assuming they are correct, Enbridge is probably still oversold and should be good to buy right now for a portfolio focused on high-yield dividend stocks.