Enbridge (TSX:ENB) now has a dividend yield of close to 8%. Yields that are this high often signal market concerns about the sustainability of the distribution. Investors are wondering if ENB stock is now simply undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on passive income of total returns.
Enbridge share price
Enbridge trades for close to $46.50 at the time of writing compared to the 12-month low of around $43. The stock was as high as $59 at one point in 2022 before markets started to worry that aggressive interest rate hikes by the Bank of Canada and the U.S. Federal Reserve would drive debt expenses too high.
Enbridge and other pipeline companies use debt to fund their growth initiatives. New assets often cost billions of dollars to build, and projects can take years to complete before the pipelines or facilities begin to generate revenue. Funding the projects is usually done through a combination of cash flow from operations, stock sales, and debt. When borrowing costs surge over a short timeframe, profits can be hit as more cash flow has to be used to service debt.
Enbridge is working through a $25 billion capital program and continues to make acquisitions. The company expects to close its US$14 billion deal to buy three American natural gas utilities this year. These businesses generate reliable and predictable cash flow that will help diversify the revenue stream. Enbridge will become the largest operator of natural gas utilities in North America. The combination of the natural gas distribution businesses with the extensive natural gas transmission network places Enbridge in a good position to capitalize on the anticipated transition to hydrogen.
In recent years, Enbridge has focused on broadening out the asset base to tap emerging opportunities. The company purchased an oil export terminal in Texas, took a stake in the Woodfibre liquified natural gas (LNG) facility being built in British Columbia, and bought a U.S. developer of solar and wind projects.
Earnings
Enbridge delivered solid results that met guidance in 2023. Adjusted earnings came in at $5.7 billion, matching the 2022 performance. Distributable cash flow (DCF) rose slightly to $11.3 billion from $11.0 billion the previous year.
DCF is expected to increase by about 3% in 2024, supported by contributions from new assets put into service and recent acquisitions.
Dividend
Enbridge increased the dividend by 3.1% for 2024. This is the 29th consecutive annual distribution hike from the board. Based on the strong capital program, ongoing acquisitions, and the solid revenue outlook, the dividend should be safe. Investors can currently get a 7.9% dividend yield from Enbridge.
Should you buy now or wait?
Ongoing volatility should be expected until the Bank of Canada and the U.S. Federal Reserve start to cut interest rates. That being said, Enbridge already looks cheap and offers an attractive dividend that should continue to grow. Existing investors should probably hold the stock. New investors might want to take advantage of the latest dip to start a position and look to add more on further weakness. Once interest rates start to decline, this stock could catch a nice tailwind.
