Enbridge (TSX:ENB) offers investors one of the best dividend-growth track records on the TSX, but the high yield driven by the decline in the share price over the past two years has investors wondering if the market is anticipating a dividend cut.
Enbridge stock price
Enbridge trades near $49 at the time of writing compared to $59 at one point in 2022. The pullback took the share price as low as $43 last fall. Since then, bargain hunters seeking high yields have started nibbling in anticipation of support from interest rate cuts.
The Bank of Canada just reduced its interest rate by 0.25% after aggressively raising rates in 2022 and 2023. Higher interest rates drive up borrowing costs for businesses like Enbridge that use debt to fund part of their growth initiatives. The rise in debt expenses reduces profits and cuts into cash that can be used for distributions.
Additional cuts from the Bank of Canada are expected later this year and through 2025. The U.S. Federal Reserve is still waiting for more evidence that inflation is under control, but markets broadly expect the American central bank to start cutting rates in late 2024 or early next year. This will help Enbridge and could provide a new tailwind for the stock.
Growth projects
Enbridge is in the process of completing its US$14 billion acquisition of three natural gas utilities in the United States. The deals make Enbridge the largest natural gas utility operator in North America. Natural gas demand is expected to grow in the coming years as a solution to fuel power generation required to keep up with the surge in electricity needed to run artificial intelligence (AI) data centres.
Enbridge also has a $25 billion secured capital program that will contribute to revenue and cash flow growth in the coming years. Management expects distributable cash flow (DCF) to increase by 3% annually through 2026 and by 5% beyond that timeline.
Enbridge’s extensive oil pipelines carry 30% of the oil produced in Canada and the United States. The company also owns the largest oil export terminal in Texas. Global oil demand is expected to remain strong even as the world transitions to electric vehicles.
Finally, Enbridge continues to expand its renewable energy group to take advantage of the shift to solar and wind power.
Dividend safety
Enbridge’s dividend should be safe. In fact, investors will likely see the distribution continue to grow in line with the expansion of DCF. Falling interest rates in Canada and the United States will reduce debt expenses, helping to free up more cash. At the same time, contributions from acquisitions and new assets should support the cash flow needed to boost the payout.
Enbridge currently provides a 7.5% yield.
Is ENB stock a buy?
Enbridge isn’t as cheap as it was last fall, but the stock still looks attractive at the current price and offers a generous dividend that should continue to grow. If you have some cash to put to work in a portfolio targeting high-yield dividends, this stock deserves to be on your radar.
