Better Buy: Enbridge Stock or TC Energy Stock?

Given their solid underlying businesses, excellent track record of dividend growth, and high dividend yields, let’s assess which among Enbridge and TC Energy would be an excellent buy.

Rajiv Nanjapla ❯

Rajiv Nanjapla has been with Motley Fool Canada since July 2020. He has over eight years of experience in analyzing financial statements and writing financial research reports. His area of interest includes cannabis, retail, technology, and energy. He also holds a post-graduate diploma in finance and operations.

Published November 20, 2023 4:40 pm EST

The Canadian equity market is witnessing healthy buying this month amid an improvement in investors’ sentiments. The United States Consumer Price Index rose 3.2% in October, below analysts’ expectations of 3.3%. The signs of inflation slowing down and the Federal Reserve not hiking its interest rates have raised investors’ confidence, thus driving the S&P/TSX Composite Index by 6.9%.

Amid the optimism, the stock price of Enbridge (TSX:ENB) and TC Energy (TSX:TRP) have increased by 6% and 5.4% this month, respectively. Despite the recent increases, both companies are down for this year. The rising interest rates have weighed on their stock prices, giving their capital-intensive business. With the improvement in investors’ sentiments, let’s assess which of the two stocks could be a better buy.

Enbridge

Enbridge transports 30% of crude oil produced in North America and 20% of natural gas consumed in the United States. It is North America’s third-largest natural gas utility company and has a strong presence in the renewable space. The company’s cash flows are stable and predictable, given its regulated assets, long-term contracts, and inflation-indexed cash flows. Supported by its solid cash flows, the company has been paying dividends since 1955 while raising the same for 28 consecutive years at a CAGR (compound annual growth rate) of 10%.

In September, the Calgary-based energy company signed three separate agreements to acquire three natural gas utility companies in the United States for $19 billion. The acquisitions could double its natural gas utility business while increasing the contribution from the natural gas utility business to 22% of the company’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization). The concerns over the increase in the company’s debt levels amid these acquisition has put the company under pressure. Amid the pullback, the company trades at 16.6 times its projected earnings for the next four quarters while offering a forward dividend yield of 7.68%.

Further, Enbridge is also progressing with its $24 billion secured growth program that spans through 2028. Amid these growth initiatives, the company’s management expects its adjusted EBITDA and adjusted EPS (earnings per share) to grow at a CAGR of 4-6% through 2025 and 5% after that. So, the company’s growth prospects look healthy.

TC Energy

TC Energy is another midstream company with energy infrastructure facilities across North America. With around 95% of its adjusted EBITDA generated from regulated assets and long-term contracts, the company can generate strong cash flows irrespective of the economic outlook. These strong cash flows have allowed it to raise its dividends consistently since 2000 at a CAGR of around 7%. With a quarterly dividend of $0.93/share, its forward yield at 7.39%. It also trades at a cheaper NTM (next 12-month) price-to-earnings multiple of 13.2.

Meanwhile, the midstream energy company is considering reducing its debt levels amid rising interest rates. It sold its 40% stake in Columbia Gas Transmission and Columbia Gulf Transmission to Global Infrastructure Partners for $5.3 billion. The company has utilized the net proceeds to pay off its existing debt. Also, it is on track to achieve its debt/EBITDA ratio of 4.75 by 2024. Further, the company expects to make capital spending of $6-$7 billion annually from next year, which could boost its financials in the coming years. Amid these investments, TC Energy’s management expects its adjusted EBITDA to grow at an annualized rate of 6%.

The company is evaluating spinning off its liquids segment, which could improve the flexibility of both companies to pursue their growth objectives. Meanwhile, the company’s management expects the spinoff could allow it to grow its adjusted EBITDA at a CAGR of 7%.

Investors’ takeaway

Both companies are excellent buys for income-seeking investors due to their consistent dividend growth, stable cash flows, high dividend yield, and healthy growth prospects. But I am more bullish on Enbridge due to the uncertainty surrounding TC Energy’s spinoff of its liquids segment. Also, Enbridge offers a higher dividend yield.