Is Enbridge Stock Too Cheap to Ignore for Passive Income?

oil and gas pipeline
Image source: Getty Images

Written by Andrew Walker at The Motley Fool Canada

Canadian retirees and other savers are searching for top TSX dividend stocks to add to their self-directed Tax-Free Savings Account (TFSA) portfolios. The pullback in the share price of Enbridge (TSX:ENB) has investors wondering if ENB stock is now undervalued and good to buy for the high dividend yield.

Enbridge overview

Enbridge plays a key role in the smooth operation of the Canadian and U.S. economies. The company moves 30% of the oil produced in the two countries and transports 20% of the natural gas consumed by American homes and businesses. In Canada, natural gas distribution utilities provide millions of residential and commercial customers with fuel.

In addition, Enbridge expanded into export facilities in the past couple of years after its US$3 billion acquisition of an oil export terminal in Texas and the purchase of a 30% stake in the Woodfibre liquified natural gas (LNG) facility being built on the coast of British Columbia.

Renewable energy operations in North America and Europe round out the bulk of the asset base. Enbridge has future growth opportunities in carbon capture and hydrogen.

Enbridge trades below $47 per share at the time of writing compared to $59 in early June last year.

The drop is largely due to the surge in interest rates over the past year. The Bank of Canada and the U.S. Federal Reserve are raising interest rates to try to get inflation under control. Enbridge and other companies that use debt as part of their funding program to finance capital programs will see borrowing costs increase. This can put a dent in profits. In addition, higher rates available on fixed-income investments are competing with dividend stocks for investor cash.

The decline in the share price, however, looks overdone, given Enbridge’s solid revenue and financial results in the past year.

Enbridge earnings

Enbridge reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $8.48 billion for the first half of 2023 compared to $7.86 billion in the same period last year. Adjusted earnings came in at $3.11 billion compared to $3.06 billion, and distributable cash flow (DCF) was $5.96 billion compared to $5.82 billion.

The company confirmed guidance for the year that will see adjusted EBITDA top 2022 results. The expected mid-range for DCF per share is roughly in line with DCF in 2022.

Dividends and share buybacks

Enbridge increased the dividend in each of the past 28 years. The current capital program and potential strategic acquisitions should support ongoing annual distribution growth in the 3-5% range. At the time of writing, ENB stock provides a 7.6% dividend yield.

Enbridge has a share-buyback program in place that enables the company to repurchase up to $1.5 billion in stock over a 12-month timeframe. Management spent about $125 million on buybacks in the second quarter.

Should you buy ENB stock now?

Ongoing volatility should be expected until the central banks signal an end to rate hikes. That being said, Enbridge already looks oversold and pays a great dividend that should continue to grow.

If you have some cash to put to work in a self-directed TFSA targeting passive income, this stock appears cheap right now and deserves to be on your radar.

The post Is Enbridge Stock Too Cheap to Ignore for Passive Income? appeared first on The Motley Fool Canada.

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The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.