Enbridge (TSX: ENB) pays a generous dividend and has a great track record of distribution growth. Investors who missed the recent bounce in the share price 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 PlanĀ focused on passive income and total returns.
Enbridge stock
Enbridge trades for close to $49.50 at the time of writing compared to $45.50 in April, but the stock is still down from the $59 it reached two years ago.
The decline that occurred through the second half of 2022 and the first three quarters of 2023 largely happened as a result of aggressive hikes in interest rates by the Bank of Canada and the U.S. Federal Reserve. High inflation forced the central banks to raise borrowing rates to cool off the hot post-pandemic recovery. Rate hikes take time to work their way through the economy, but the strategy appears to be working. April 2024 inflation was 2.7% in Canada, down from 8% in June 2022. South of the border, the April 2024 inflation rate was 3.4%, compared to 9% at the worst point in 2022.
Enbridge uses debt to fund part of its growth program that includes acquisitions and internal development projects. Higher borrowing costs reduce profits and can cut into cash that is available for distributions to shareholders. The central banks have indicated that their next rate changes will likely be to the downside. Once that happens, investors could start to move more aggressively back into ENB stock.
Growth
Enbridge is wrapping up a US$14 billion acquisition of three natural gas utilities in the United States in 2024 and has a $25 billion secured capital program on the go. Revenue and cash flow should grow as new assets go into service. Enbridge expects distributable cash flow to rise by 3% per year through 2026 and by about 5% beyond that timeframe.
Dividends
Enbridge increased the dividend in each of the past 29 years. The board raised the payout by 3.1% for 2024 and ongoing annual hikes of at least 3% should be on the way based on the outlook for DCF growth in the next few years. Investors who buy ENB stock at the current level can get a dividend yield of 7.4%.
Is ENB stock good to buy right now?
Volatility should be expected in the near term. A meaningful pullback in the broader equity market wouldn’t be a surprise before the end of the year after the big rally that occurred in recent months. Any hints that inflation could remain sticky or tick upwards would likely also put additional pressure on Enbridge and other high-yield pipeline stocks.
That being said, buy-and-hold investors seeking high dividend yields should be comfortable owning ENB at this level. As soon as the central banks start cutting rates, this stock could move quickly to the upside. Additional weakness should be viewed as an opportunity to add to the position.
If you have some cash to put to work in a divided portfolio this stock deserves to be on your radar.
