Enbridge (TSX: ENB) chalked up some big gains over the past year, but the stock has pulled back a bit in the past few weeks. Investors who missed the rally are wondering if Enbridge stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and long-term capital gains.
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Enbridge share price
Enbridge trades near $61.50 at the time of writing. The stock is up close to 30% in the last 12 months and went as high as $65 in January.
Interest rates have been the main story for the stock’s movements over the past three years. Enbridge traded around $59 in June 2022, just before the Bank of Canada and the U.S. Federal Reserve started to aggressively raise interest rates to fight inflation that topped 8% in Canada and 9% south of the border in that month.
Higher interest rates drove up debt expenses on variable-rate loans. Rising yields on government bonds pushed up borrowing costs in the debt market. Enbridge uses debt as part of its funding strategy for its growth initiatives, including acquisitions and organic development projects that cost billions of dollars. Investors worried that the surge in borrowing expenses would cut into cash to the point where Enbridge might be forced to reduce the generous dividend.
By the fall of 2023, the stock had fallen to $44. Bargain hunters started buying at this point, as sentiment in the market shifted from fears of more rate hikes to anticipation of rate cuts in 2024. The central banks delivered the rate reductions in the second half of last year. This provided an extra tailwind for Enbridge into the new year.
Looking ahead, analysts broadly expect the central banks to continue the trend of lowering interest rates later this year in order to support a weakening economy caused by trade disputes. There is a risk, however, that tariffs will trigger a new surge in inflation that could force the Bank of Canada and the U.S. Federal Reserve to hold rates steady or potentially even start raising them again if inflation spikes.
Investors should keep an eye on government bond yields to get a sense of where borrowing costs are headed. The yield on the U.S. 10-year treasury has trended higher since early April and is now at a similar level to where it was at this time last year.
Operational outlook
Enbridge completed a US$14 billion purchase of three natural gas utilities in the United States in 2024. Revenue from these deals will help drive higher profits going forward. In addition, Enbridge is working on a $28 billion capital program to deliver extra earnings growth.
Demand for Canadian and U.S. natural gas and oil is expected to grow as international buyers seek out reliable supplies from stable countries. Domestic demand, especially for natural gas, is projected to surge as gas-fired power facilities are built to supply electricity for new AI data centres. Enbridge’s extensive oil and gas infrastructure in Canada and the U.S. puts the company in a good position to benefit.
Enbridge raised the dividend in each of the past 30 years. The capital program should support ongoing dividend growth. Investors who buy ENB stock at the current level can get a dividend yield of 6.1%.
Time to buy?
Additional downside is possible if the market starts to price in the possibility that rate cuts are done. That being said, income investors should be comfortable buying the recent dip in ENB stock and should consider adding to the position on further weakness. The dividend should continue to grow, and you get paid well to ride out some turbulence.
