Enbridge (TSX:ENB) is up about 11% since early October. Canadian pensioners seeking high-yield dividends are wondering if ENB stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on passive income.
Enbridge trades near $47.75 at the time of writing compared to the 12-month bottom of around $43, but it is still down considerably from the $59 it reached at the 2022 peak.
The pullback is largely due to the impact of rising interest rates in Canada and the United States. Higher interest rates pushed up bond yields and made borrowing more expensive for businesses like Enbridge that have large capital programs and use debt to fund part of their growth strategies. A surge in debt expenses eats into profits and can reduce the cash that is available for distributions to shareholders. Enbridge recently announced plans to trim staff by 650 positions, partly as an effort to counter the hit from the jump in debt costs.
Despite the headwinds, the dip in the share price might be overdone. Enbridge is expected to report solid financial results for 2023, and guidance is for growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of about 4% for 2024. Distributable cash flow (DCF) is expected to increase by about 3% this year.
Enbridge grows through a combination of acquisitions and development projects. The guidance for 2024 is based on anticipated impacts from deals that closed last year and new assets that will be completed as part of the ongoing $25 billion capital program. Enbridge also expects to complete its US$14 billion purchase of three natural gas utilities in the United States at some point in 2024. The extra revenue and cash flow from these assets could boost the 2024 guidance once the deals close.
Enbridge raised the dividend by 3.1% for 2024. This marks the 29th consecutive annual increase in the distribution. Retirees and other investors seeking reliable and growing passive income should be comfortable with the stability of the payout. At the current share price, ENB stock provides a 7.6% dividend yield.
Should you buy ENB stock now?
Ongoing volatility should be anticipated until the Bank of Canada and the U.S. Federal Reserve begin to cut interest rates. If the central banks lower interest rates as expected this year, this stock could move meaningfully higher. A signal that they will hold rates at current levels into 2025 would likely put new pressure on the share price.
That being said, ENB stock still looks cheap at the current level, and you get paid well to ride out any additional turbulence. If you have some cash to put to work in a TFSA focused on passive income, Enbridge probably deserves to be on your radar.