Enbridge (TSX:ENB) is picking up a new tailwind on the heels of the latest interest rate cut by the Bank of Canada. Investors who missed the bounce 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 Plan (RRSP) portfolio.
Enbridge share price
Enbridge traded as high as $59 in June 2022 before going into a steady decline triggered largely by hikes to interest rates in Canada and the United States. The stock fell as low as $43 last fall before bargain hunters started to buy again in the hopes of rate cuts in 2024.
The steady trend to the upside since early October should continue. The Bank of Canada has already reduced rates twice in 2024 by a total of 0.5%. Economists broadly expect the U.S. Federal Reserve to start reducing interest rates in the coming months and both central banks will likely extend rate cuts through 2025 in the hope of navigating a soft landing for the economy.
High interest rates drive up borrowing costs for companies like Enbridge that use debt to fund part of their growth programs. Enbridge made several acquisitions in recent years and has a $25 billion secured capital program on the go that will boost the asset base. In 2024, the company is wrapping up its US$14 billion purchase of three natural gas utilities in the United States. The drop in interest rates will help reduce debt expenses. This keeps more cash available that can be used to pay dividends or reduce the amount of debt the company is carrying. Lower borrowing costs might also make the difference in determining if a new growth project can go ahead.
Outlook
Earnings before interest, taxes, depreciation, and amortization (EBITDA) are expected to grow by an average of about 5% per year over the medium term as new assets are completed and go into service. Enbridge expects to invest about $19 billion in projects from 2024 to 2026.
Dividends
Enbridge raised the dividend in each of the past 29 years. At the current share price near $51, the stock provides a dividend yield of 7%. Even if the share price stays close to the current level investors get paid a solid annual return.
Distributable cash flow (DCF) is expected to increase by 3% per year through 2026 and by about 5% starting in 2027. This should enable dividend growth in the same range.
Time to buy ENB stock?
As soon as the U.S. Federal Reserve begins to cut interest rates, a new surge of money could flow into the pipeline sector. Enbridge still looks attractive at the current price, and it wouldn’t be a surprise to see the stock drift up to the 2022 high by the end of next year.
If you have some cash to put to work in a portfolio targeting high-yield dividend stocks, Enbridge deserves to be on your radar.
