Royal Bank (TSX:RY) and Enbridge (TSX:RY) are TSX giants and leaders in their respective industries. The shares have rallied in recent weeks, partly due to dividend increases for 2024. Investors who missed the bounce are wondering if RY or ENB stock is still undervalued and good to buy for a portfolio focused on income or total returns.
Royal Bank
Royal Bank has a market capitalization near $185 billion. The stock trades for close to $133 per share at the time of writing compared to less than $110 around the end of October and as high as $147 in early 2022.
Royal Bank is waiting to see if the government will give the final approval on its planned $13.5 billion acquisition of HSBC Canada. The deal would add more than 100 branches and a portfolio of high net-worth clients with international connections. If the acquisition gets the green light, RY stock could pick up an additional tailwind.
Royal Bank generated solid results for fiscal 2023, despite the increase in provisions for credit losses caused by soaring interest rates. Adjusted net income came in at $16.1 billion for the year, up slightly from fiscal 2022.
Royal Bank finished fiscal 2023 with a common equity tier one (CET1) ratio of 14.5%. This is significantly above the 11.5% required by the government, so Royal Bank has excess cash on hand to help it ride out economic turbulence. That being said, a good chunk of the extra funds would be used up to cover the purchase of HSBC Canada.
Economists broadly expect the economy to go through a short and mild recession as the central bank works to get inflation back to 2%. If that turns out the be the case and interest rates begin to decline in 2024, there could be a new surge of investment interest in the Canadian banks.
Royal Bank recently increased the dividend for the second time in 2023. Investors who buy the stock at the current price can get a 4% dividend yield.
Enbridge
Enbridge trades for close to $47.50 at the time of writing compared to $59 at the high point last year and as low as $43 in early October.
The energy infrastructure firm continues to grow through acquisitions and organic projects. Enbridge recently announced a US$14 billion deal to buy three natural gas utilities in the United States. The company is also working on a $25 billion capital program.
Enbridge moves 30% of the oil produced in the U.S. and Canada and 20% of the natural gas used in the United States. This infrastructure, along with the addition of an oil export terminal and Enbridge’s stake in the Woodfibre LNG facility being built in British Columbia, puts Enbridge in a good position to benefit from growing international demand for North American energy.
Enbridge raised the dividend by 3.1% for 2024. The board has now increased the distribution annually for the past 29 years. Investors who buy ENB stock at the current level can get a 7.7% dividend yield.
Is one a better pick?
Royal Bank and Enbridge pay attractive dividends that should continue to grow. Both stocks are industry leaders and deserve to be in a buy-and-hold portfolio. That being said, I would probably make Enbridge the first choice today due to the higher yield. ENB stock still appears oversold, while RY is probably fairly valued now after the big run in the past few weeks.
