BCE (TSX:BCE) and Enbridge (TSX:ENB) fell out of favour with investors in the past two years as interest rate hikes drove up borrowing costs for the companies, putting pressure on profits.
The drop in the share prices of BCE and Enbridge from the 2022 highs has pushed the dividend yields to high levels. Investors with a contrarian investing strategy are wondering if BCE stock or ENB stock is undervalued right now and good to buy for a self-directed portfolio focused on passive income.
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BCE
BCE investors took a big hit over the past two years. The stock currently trades near $45 compared to $74 at one point in 2022. The recent slip below $43 took the stock to a level not seen in more than a decade.
Investors need to be careful, as the stock has trended lower for the past 27 months. However, BCE is starting to look oversold at this point and there is decent upside potential on a rebound.
The company announced staff cuts of roughly 6,000 positions over the past year in a move that will reduce expenses and should position the business to meet financial targets as it grapples with weak advertising revenue in the radio and television segments of the media group. BCE sold or closed dozens of radio stations and trimmed programming across the TV segment to adjust to the challenges.
For the full year, BCE still expects to generate revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) that are in line with 2023 or slightly higher. The core mobile and internet services businesses remain strong, and the cost cuts, coupled with anticipated lower interest rates, should stabilize earnings in 2025.
Investors who buy BCE at the current level can get a dividend yield of 8.8%.
Enbridge
Enbridge slipped from $59 in June 2022 to around $43 last fall. The stock has trended higher since that time as bargain hunters emerged on anticipation of cuts to interest rates in Canada and the United States in 2024. The Bank of Canada has already started lowering rates and the U.S. Federal Reserve is expected to begin reducing rates before the end of this year.
Enbridge uses debt to fund part of its growth program. Lower borrowing costs should prop up profits and boost cash available for distributions. Enbridge is wrapping up its US$14 billion purchase of three natural gas utilities in the United States. The company is also working on $25 billion in secured capital projects. As new assets come online, the company expects distributable cash flow to rise by 3% per year through 2026 and by 5% after that timeframe.
Investors who buy ENB stock at the current price near $50 can still get a 7.25% dividend yield.
Is one a better buy today?
BCE offers a higher yield, but Enbridge is probably the safer pick right now. The recovery in the share price over the past nine months indicates the worst of the impact from higher interest rates is probably in the rearview mirror.
BCE could finally be at a bottom, but it is too early to tell. That being said, contrarian investors might want to start nibbling. Based on the 2024 guidance, the stock is likely oversold, and the distribution should be safe.
