Enbridge (TSX:ENB) pays a generous dividend, but the stock has rallied considerably over the past year. Investors who missed the rebound are wondering if ENB stock is still undervalued and good to buy right now for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on income or total returns.
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ENB stock
Enbridge trades near $55 per share at the time of writing compared to $43 in early October last year. The stock is approaching the $59 it reached in 2022 before rising interest rates in Canada and the United States triggered a pullback across the energy infrastructure sector.
Enbridge uses debt to fund part of its growth program, which includes a combination of acquisitions and development projects. The sharp rise in interest rates in 2022 and through much of 2023 drove up borrowing costs. This puts a dent in profits and can reduce the cash that is available for distributions.
Market sentiment shifted last fall from fears of higher rates to anticipation of rate cuts in 2024. It took a bit longer than initially expected, but the Bank of Canada and the U.S. Federal Reserve have now started reducing interest rates. More cuts are expected. Inflation is back within target levels, and the central banks want to avoid causing a recession. With this thought in mind, ENB stock should see ongoing support through next year as long as the economy makes a soft landing.
Growth
Enbridge is near the completion of its US$14 billion acquisition of three natural gas utilities in the United States. The deals make Enbridge the largest operator of natural gas utilities in the United States. Enbridge is also working on a $24 billion capital program that will deliver new revenue and help boost cash flow in the coming years. Management is targeting 7-9% growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2023 to 2026 and 3% growth in distributable cash flow.
As a result, investors should see steady increases in the dividend. Enbridge raised the distribution in each of the past 29 years.
Risks
The recently completed Trans Mountain pipeline in Canada is competing with Enbridge’s network to transport Canadian oil production. As a result, oil producers have gone from seeing pipeline bottlenecks to ample options for getting products to market. Enbridge has subsequently reduced its tolls on the system to attract enough volume. This will have a negative impact on revenue going forward. That being said, the newly acquired gas utilities, along with the large capital program, will help offset the reduction.
Markets are at record highs despite uncertainty around the U.S. election, rising geopolitical risks, and a possible recession next year. Share prices could push higher, but it wouldn’t be a surprise to see a meaningful broad-based correction in the coming months. If that happens, ENB stock will likely follow the market.
Should you buy, hold, or sell ENB stock now?
Income investors with a buy-and-hold outlook should be comfortable owning Enbridge at this price, even if it pulls back in the near term. The dividend yield is currently close to 6.7%, and dividend hikes are likely to be on the way.
New investors focused more on total returns might want to take a half position and look to add on a dip. Existing owners of the stock who bought a year ago might even consider taking some profits with an eye to rebuilding the position on any correction.
