Enbridge (TSX:ENB) is up 24% in 2024. Investors who missed the rally are wondering if ENB stock is still undervalued and good to buy for a self-directed Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) portfolio focused on dividends.
Enbridge stock
Enbridge is a giant in the North American energy infrastructure industry, with a current market capitalization of nearly $130 billion. The stock trades close to $60 per share at the time of writing. That’s up from a 12-month low of around $45 and just shy of the recent multi-year high.
Enbridge spent the past few years diversifying its asset portfolio. The company purchased an oil export terminal in Texas, acquired a renewable energy project developer, took a stake in the new Woodfibre liquified natural gas (LNG) export facility being built in British Columbia, and recently closed its US$14 billion purchase of three natural gas utilities in the United States.
The core oil and natural gas transmission networks remain strategically important for Enbridge. Roughly 30% of the oil produced in Canada and the United States runs through Enbridge’s pipelines. The company also transports about 20% of the natural gas used by American homes and businesses.
Global oil demand continues to rise at a steady pace, while natural gas is expected to see a boom in the coming years as countries build new gas-fired power-generation facilities to meet surging electricity demand. Artificial intelligence data centres will drive much of the demand for power, but electric vehicles and economic growth in developing countries will also play a role.
The transition to renewables will continue, and Enbridge’s solar and wind business will benefit. Renewables have limitations, however, so there will always be a need for reliable power generation that can meet demand surges and cover for times when the wind dies down and the sky is cloudy. Natural gas emits less carbon dioxide than oil or coal when burned, so gas-fired power generation will play an important role.
Growth
Enbridge is working on a $27 billion capital program in addition to its acquisition strategy. As new assets are completed and go into service, Enbridge expects to see earnings before interest, taxes, depreciation, and amortization (EBITDA) rise by 7% to 9% through 2026. Adjusted earnings per share growth is targeted at 4% to 6%. Distributable cash flow (DCF) is expected to grow by 3% over the same timeframe. This should support annual dividend increases in the same range.
Risks
Enbridge’s share price fell from $59 in 2022 to around $44 last year. The pullback occurred as the Bank of Canada and the U.S. Federal Reserve increased interest rates to fight inflation. The end of rate hikes and the subsequent cuts by the central banks largely drove the rebound in the share price in 2024. Enbridge uses debt to fund its growth initiatives, so higher borrowing costs reduce profits and can cut into cash that is available for distributions.
Inflation has moved higher in the past couple of months. If the central banks are forced to put additional rate cuts on hold or need to raise rates again next year, ENB could come under renewed pressure.
Is ENB stock a buy?
Income investors with a buy-and-hold strategy should be comfortable owning Enbridge at this level. Any downside would be an opportunity to add to the position. If you have some cash to put to work in a portfolio focused on high yields, this stock deserves to be on your radar.
