Pipeline stocks on the TSX, including Enbridge (TSX:ENB) and TC Energy (TSX:TRP), took a big hit over most of the past 18 months. A recent rebound has investors who missed the 2022 bottom wondering if ENB stock or TRP stock is still undervalued and good to buy for a Tax-Free Savings Account (TFSA) targeting passive income or a self-directed Registered Retirement Savings Plan (RRSP) focused on total returns.
Enbridge
Enbridge reported third-quarter (Q3) 2023 results that were roughly in line with the same quarter last year. Adjusted earnings came in at $1.3 billion compared to $1.4 billion in Q3 2022. Distributable cash flow, which is important for dividend investors, was $2.6 billion in the quarter, up from $2.5 billion.
Enbridge stock, however, is still down more than 10% in 2023, even after the recent rally.
The drop is more due to the impact of rising interest rates than to any particular operational issues. Higher rates drive up borrowing costs for businesses. This can put a dent in profits and reduce cash available for distributions. Enbridge uses debt to help finance its growth initiatives, so it makes sense that investors would react negatively to soaring interest rates.
At this point, the drop in the share price appears overdone. Enbridge’s assets are performing well, and management expects new acquisitions, along with the capital program, to deliver revenue and distributable cash flow growth. The company recently announced a US$14 billion deal to buy three natural gas utilities in the United States.
Investors who buy ENB stock at the current level can get a 7.7% dividend yield. The board has increased the payout for 29 consecutive years.
TC Energy
TC Energy has also had a rough ride in the markets. The stock was as high as $74 in early June of 2022. It slipped as low as $45 this fall but has staged a nice recovery over the past two months and now trades around $52.
The company recently reached mechanical completion on its $14.5 billion Coastal GasLink pipeline. This is a relief for investors as the project’s final cost is more than double the original budget. Management has done a good job of monetizing assets to reduce debt and shore up the balance sheet this year. TC Energy raised $5.3 billion through the sale of an interest in some American assets. The company also plans to spin off the oil pipeline business in 2024.
As with Enbridge, TC Energy’s existing assets are delivering solid results in challenging economic conditions. Earnings before interest, taxes, depreciation, and amortization (EBITDA) are expected to be about 8% above 2022.
TC Energy has increased the dividend annually for more than two decades. Investors who buy TRP stock at the current level can get a 7.1% dividend yield.
Is one a better pick?
Enbridge and TC Energy pay attractive dividends that should continue to grow. If you have some cash to put to work, both stocks should be solid bets for a portfolio targeting high-yield dividends. At the current price point, I would probably make Enbridge the first choice. It has a higher yield, and the recent deal for the utility assets should help support distribution growth in the coming years.
