Enbridge (TSX: ENB) is down about 8% in the past month. Investors who missed the big rally before the latest pullback are wondering if ENB stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
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Enbridge share price
Enbridge trades near $59 per share at the time of writing compared to more than $64 a few weeks ago. The stock is still up 27% over the past year.
Enbridge’s rebound started in the fall of 2023 when market sentiment began to shift from fears of higher interest rates to expectations of rate cuts in both Canada and the United States. The stock had dropped from $59 in 2022 to $44 in October 2023 as a result of aggressive rate hikes by the Bank of Canada and the U.S. Federal Reserve. High inflation forced the central banks to boost interest rates. Pipeline and utility companies that use a lot of debt to fund their growth projects took a hit as interest expenses moved higher.
With inflation back down to near-target levels, the central banks began to reduce interest rates in the second half of 2024. This provided a new tailwind for Enbridge, helping drive the stock back above the 2022 highs.
Risks
The recent dip is partly due to profit-taking after the big run. In addition, markets are starting to scale back expectations for the pace and size of additional rate cuts in 2024. Inflation concerns are bubbling up again amid worries that widespread tariffs placed on goods entering the United States could drive up prices.
Pundits are even speculating that the U.S. Federal Reserve might have to raise interest rates again in late 2025 or in 2026 rather than extending the rate cuts that occurred over the past several months. In that scenario, Enbridge and other utility stocks could face new headwinds.
Growth
Enbridge continues to invest in the expansion of its assets and portfolio diversification. The company spent US$14 billion to acquire three natural gas utilities in the United States last year. The deals made Enbridge the largest natural gas utility operator in North America. Demand for natural gas is expected to rise in the coming years as tech companies build gas-fired power stations to supply electricity for new AI data centres.
Enbridge put $5 billion in projects into service in 2024 and added another $8 billion to the capital program. The current $26 billion in ongoing projects should help drive revenue and cash flow expansion to support steady dividend increases. Enbridge raised the dividend in each of the past 30 years. Investors can currently pick up a dividend yield of 6.4%.
Should you buy now?
Near-term volatility in the broader market is expected due to the uncertainty around trade policy in the United States. That being said, income investors with a buy-and-hold strategy should be comfortable owning ENB stock at this level. Additional downside would be viewed as an opportunity to add to the position.
