Enbridge (TSX:ENB) is down 14% in the past year and currently offers a dividend yield of close to 8%. Contrarian investors seeking passive income and a shot at some decent capital gains are wondering if ENB stock is undervalued and a good buy today for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Enbridge share price
Enbridge trades near $46 per share at the time of writing. That’s up from the 12-month low of around $43 but is still way off the $59 the stock price reached in 2022.
Weakness over the past two years is mostly due to rising interest rates in Canada and the United States. The Bank of Canada and the U.S. Federal Reserve raised interest rates aggressively to cool off hot post-pandemic economies and to try to bring the jobs market into balance. Excessive demand for products and services drove inflation to 9% in the United States and 8% in Canada at the peak in June 2022. Making debt more expensive forces households to trim discretionary spending. This typically reduces price hikes and eases upward pressure on wages.
Inflation for March 2024 came in at 3.5% in the U.S. and 2.9% in Canada. This is still above the 2% target, but progress is being made.
Interest rate impact on Enbridge?
Enbridge uses debt to fund part of its growth program, which includes the current $25 billion capital plan and acquisitions. Higher borrowing costs eat into profits and can reduce cash available for distributions.
Economists broadly expect the central banks to start cutting interest rates in the second half of this year. When rates begin to fall, there could be a surge of new interest in Enbridge stock.
Earnings
Enbridge hit its financial goals in 2023, and management expects the business to deliver solid results in 2024 and over the next few years. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are expected to rise by 7-9% per year through 2026 and about 5% beyond that timeframe. Distributable cash flow (DCF) should increase by 3% annually until 2026 and about 5% per year afterwards.
Assuming Enbridge meets these targets, the dividend should continue to grow at a rate of 3-5% per year. Enbridge raised the distribution by 3.1% for 2024 and has increased the payout annually for the past 29 years.
Outlook for oil and natural gas
Enbridge moves 30% of the oil produced in Canada and the United States. It also transports 20% of the natural gas used by American homes and businesses. In recent years, the investment focus has shifted from the construction of large new pipelines to export opportunities and natural gas utilities, along with the expansion of the wind and solar assets.
Canada and the United States are seeing an increase in global demand for reliable oil and liquified natural gas (LNG) as countries look to acquire supplies from stable countries that are not at risk of geopolitical supply disruptions. Enbridge’s extensive infrastructure positions it to benefit from the rise in exports of oil and LNG to international buyers.
Should you buy now?
Near-term volatility should be expected until there is more clarity on when the central banks will start to cut interest rates. However, Enbridge pays an attractive dividend that should continue to grow. If you have some cash to put to work, this stock looks cheap today and deserves to be on your radar.
