Enbridge (TSX:ENB) is up about 14% since early October last year. Investors who missed the rally are wondering if ENB stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on passive income or total returns.
Enbridge stock
Enbridge trades for close to $49 at the time of writing. That’s up from $43 a few months ago but is still well below the $59 the share price reached at the high point in 2022.
The steady decline in the share price that occurred through the second half of 2022 and during the first three quarters of 2023 coincided with a stream of interest rate hikes in Canada and the United States as the Bank of Canada and the U.S. Federal Reserve raced to get inflation under control.
Rising interest rates led to an increase in bond yields and a jump in rates offered on safe investments, like Guaranteed Investment Certificates (GICs). This caused a double hit to Enbridge’s stock. First, investors likely shed the shares on concerns that higher borrowing costs might put a big dent in profits. Enbridge uses debt to fund part of its growth program, which comprises capital projects and acquisitions. Income investors might have also decided to shift money out of Enbridge stock and into no-risk GICs that offered attractive rates above 5% for multi-year terms for much of last year.
Looking back, the drop in the share price was likely overdone. Enbridge’s assets performed well last year. Management expects the overall business to deliver growth in distributable cash flow (DCF) of about 3% in 2024, not counting any additional benefits from acquisitions expected to close this year. Enbridge entered an agreement to buy three U.S. natural gas utilities for a total of US$14 billion. Once the deals get wrapped up, there should be a positive impact on revenue and cash flow.
Enbridge added about $7 billion in new projects to its capital program in 2023, bringing the backlog to $25 billion. As the new assets are completed and go into service, there should be a boost to cash flow in the next few years to help support the dividend.
Enbridge dividend
Enbridge raised the dividend by 3.1% for 2024. This marks the 29th consecutive annual payout to the distribution. That’s the kind of consistency that retirees and other investors seeking passive income like to see when searching for top TSX dividend stocks to add to their holdings. At the time of writing, ENB stock provides an annualized yield of 7.4%.
Is Enbridge stock still good to buy?
Ongoing volatility should be expected until there is clear evidence indicating inflation will continue to slide and that the central banks will begin to cut rates. The rally over the past three months came as investors started to bet that the central banks will begin reducing interest rates in 2024.
If that turns out to be the case, ENB stock should continue to trend higher, but any hint that rates will have to remain at current levels into 2025 could trigger a new pullback.
That being said, Enbridge still looks attractive at the current price. Investors get paid well to ride out any additional turbulence, and pullbacks should probably be viewed as buying opportunities. If you have some cash to put to work, ENB stock deserves to be on your radar.
