Pipeline stocks that pay good dividends, including Enbridge (TSX:ENB) and TC Energy (TSX:TRP), have fallen out of favour over the past two years and now trade at discounted prices. Investors are wondering if one is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio focused on generating high-yield passive income.
Enbridge
Enbridge is a giant in the North American energy infrastructure industry with a current market capitalization near $103 billion. The company moves 30% of the oil produced in Canada and the United States and 20% of the natural gas used by Americans. In addition, Enbridge owns an oil export terminal, renewable energy assets, and natural gas distribution utilities and has an interest in a new liquified natural gas (LNG) export terminal being built in British Columbia.
ENB stock trades near $49 at the time of writing. The stock slipped as low as $43 last fall and has since trended higher but remains well below the $59 it reached in 2022.
Rising interest rates are largely to blame for the weakness in the share price that occurred through the second half of 2022 and the first three quarters of 2023. Higher borrowing costs eat into profits and can reduce cash that is available to pay to shareholders. The change in sentiment in October last year occurred as investors started to bet that rate hikes were done and that 2024 would bring rate cuts.
The Bank of Canada just reduced interest rates by 0.25%. Additional cuts are expected before the end of the year. The U.S. Federal Reserve is expected to make a single rate cut of the same size in the coming months, with several more reductions anticipated in 2025. These moves should bring investor interest back into Enbridge and other pipeline stocks.
Enbridge is working on a $25 billion capital program and is in the final stages of closing its US$14 billion purchase of three natural gas utilities in the United States. As a result of the anticipated boost to revenues, management expects distributable cash flow to grow by 3% per year through 2026 and by 5% beyond that timeline. This should support continued dividend growth in the same range.
Enbridge increased the distribution in each of the past 29 years. Investors who buy at the current price can get a dividend yield of 7.5%.
TC Energy
TC Energy’s share price pulled back from above $73 two years ago to $44 in 2023 before rebounding as bargain hunters jumped in around the same time they started buying Enbridge last fall. At the time of writing, TRP stock trades for close to $53.50.
The story is similar to Enbridge’s in that TC Energy has a large capital program and uses debt to fund part of its growth initiatives. TC Energy’s share price drop is more dramatic than that of its larger peer due to some issues it had on a major project. The 670 km Coastal GasLink pipeline reached mechanical completion late last year, but came in at a cost of roughly $14.5 billion, which is more than double the initial estimate.
Management sold interests in U.S. assets for $5.3 billion last year and is on track to monetize another $3 billion in 2024 to reduce debt. In addition, TC Energy plans to spin off the oil pipelines business this year to focus on natural gas transmission and power generation. Capital expenditures are expected to be about $8 billion in 2024 and in the range of $6 billion to $7 billion annually over the medium term.
The board has increased the distribution annually for the past 24 years. At the current share price, the dividend provides a yield of 7.2%. Dividend growth will likely be in the 3-5% range as new assets go into service.
Is one a better buy right now?
Enbridge and TC Energy are good examples of top dividend-growth stocks that look undervalued today. If you simply want the highest yield, Enbridge should be the first choice. Otherwise, TC Energy offers an attractive yield that is also above 7% and might deliver better upside potential on a rebound.
If you have some cash to put to work, I would probably split a new investment between the two stocks at the current prices for a portfolio targeting high yield and total returns.
