After a long and powerful bullish phase, the energy sector is finally entering correction mode. The TSX Energy Index has fallen over 14% in the last three months, and there is no indication of the trend reversing. It’s driven by the slump of several energy giants in the sector that are being impacted by various negative forces.
However, not all energy stocks are going down. Enbridge (TSX:ENB), the largest energy company in Canada (by market capitalization), is actually gaining. Its bull market phase started a bit earlier than the sector’s downfall (early Oct. instead of mid-Oct.), and the stock has risen almost 12% since then.
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Is it too late to buy Enbridge?
There are two main reasons why it’s not too late to buy Enbridge. The first is that despite this recovery/growth phase, the stock is still heavily discounted compared to its 2022 peak.
This peak differs from most other energy stocks that experienced a powerful bullish surge and rode the positive market sentiment in the post-pandemic environment. Despite healthy valuations, those peaks seemed “propped up” on market sentiment, if nothing else.
In comparison, Enbridge’s peak was barely 5% up from its pre-pandemic peak, making it more organic and tangible. The stock slumped after that and has only recently started to recover, and since it’s still discounted, the yield is still at an attractive level: 7.5%.
The second reason is that since it’s still discounted and not too overvalued, the stock may experience further growth, and if you buy now, you may at least benefit from the growth coming up, even if you didn’t get on the train on the first station.
Fundamental strengths
The fundamental strengths of Enbridge as a stock and as a business make it a healthy and secure investment (particularly for its dividends) in almost any given market.
The company is adding to these strengths by making some smart, future-facing decisions, like the decision to expand its natural gas business. It purchased three gas distribution businesses in the U.S. in the second half of 2023, adding roughly three million new consumers (households and businesses) to its portfolio.
The company is also investing in renewables and is also planning to add hydrogen to its portfolio. Enbridge, along with Fortis, is analyzing existing gas pipelines in British Columbia from a hydrogen delivery perspective. The project is in its initial stages right now, but if Enbridge becomes a forerunner in the development of hydrogen infrastructure, it may have access to a massive new growth dimension.
There are other fundamental strengths as well, like its pipeline business, which is far safer and more stable compared to upstream and downstream energy businesses. These are especially relevant to investors considering Enbridge for its dividends.
Foolish takeaway
With 29 consecutive years of dividend growth, Enbridge is easily one of the best energy stocks you can buy for its dividends. But if you buy right now, you can ride the current upward momentum for some capital appreciation as well, though it’s difficult to say how long it will last.
