Geopolitical tensions, uncertainty around the U.S. shutdown, and high-interest rates are building fears of a recession. Oil stocks, which made shareholders wealthy in the last two years, have peaked. On the other hand, Enbridge (TSX:ENB) stock has been falling (16.5%) throughout the year, underperforming the TSX Composite Index, which surged ~1%. Enbridge stock’s consistent decline inflated its dividend yield to 8%.
What exactly is wrong with Enbridge stock? Why does it continue to fall? Should you chase the 8% yield after several high-yield stocks slashed dividends this year and pushed investors’ portfolios red?
If these questions bother you, it is time to find the answers.
What exactly is wrong with Enbridge?
Enbridge stock is caught up in a bear market. The 2021 pandemic recovery and 2022 energy crisis due to the Russia-Ukraine war drove all oil-related stocks to their cyclical high. Even a low-growth stock like Enbridge surged 62% between November 2021 and June 2022 to its cyclical peak of $59. It reached this level only once during the 2014–16 oil crisis. Thus, a correction was expected. ENB corrected to $53 by April 2023.
But the decline began from May onwards. The TSX Composite Index saw two major market pullbacks in May and the second half of September, dragging down Enbridge stock along with it.
But what kept the pipeline stock from recovering was weakness in oil and gas prices, and high interest rates. On July 27, rival TC Pipelines announced a spin-off of its oil pipeline business, whose growth rate has slowed. Enbridge has 57% revenue exposure to oil pipelines, and oil is a decelerating market.
Another low came on September 5 when Enbridge announced plans to acquire three gas utility companies in America for $19 billion. Wall Street was not happy with this deal as it would balloon Enbridge’s debt. You don’t want to take up excess debt when interest rates are high. Moreover, shareholders feel Enbridge is paying a hefty premium for low-growth gas utility companies.
To add to the bearishness, Citi head of commodities Ed Morse forecasts average oil prices to fall to US$82 in the fourth quarter and US$74 in 2024. Oil and gas prices decline in a recession, wherein consumers’ purchasing power falls, thereby pulling down demand.
Why does ENB stock continue to fall?
All the above recessionary fears keep pulling down Enbridge stock. It could continue to fall as gas demand matures and gas prices fall in North America, the key market of Enbridge.
The International Energy Agency forecasts global gas demand growth to slow to 1.6% in the 2022–26 period from 2.5% growth in the 2017–21 period. It expects this slowdown to be led by declining gas demand in mature markets, partially offset by accelerated demand in fast-growing Asian markets and gas-rich Middle East and Africa.
Referring to this report, Enbridge CEO Greg Ebel showed opportunity in North America’s LNG exports. The report expects global LNG capacity to expand by 25% between 2022 and 2026, stabilizing gas prices. All this excess LNG capacity will need to be exported. He urged the Canadian government to help Canada become an LNG export champion, supplying to markets where gas demand is rising.
Is it right to chase Enbridge’s 8% yield?
Enbridge is chasing the fast-growing North American LNG export market, intending to control a 30% share. The company has a low-risk business model. It is distributing 60% of its distributable cash flow (DCF) as dividends. The acquisition, when completed by the end of 2024, will bring accretive DCF that will help Enbridge stay on the path of dividend growth.
Even though its dividend yields have inflated to 8%, the fundamentals don’t show signs of any dividend cuts.
Because of its stability and a 67-year history of paying regular dividends, Enbridge stock price has started to work like a bond. Bond prices fall when interest rates rise. Now is an opportune time to buy the stock and lock in a higher yield. Enbridge stock could rise and give you capital appreciation when interest rates fall.
