Enbridge (TSX:ENB) is up 31% in the past six months and recently hit a new multi-year high. Investors who missed the rally are wondering if Enbridge stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
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Enbridge share price
Enbridge trades near $63 per share at the time of writing. The stock has regained all of its 2022 and 2023 losses and now trades at its highest point since 2015.
Changes to interest rates drove much of the action over the past couple of years and will likely continue to have an impact.
Why?
Rate hikes in Canada and the United States in 2022 and 2023 triggered concerns among investors that Enbridge might have to trim its generous dividend to cover rising interest expenses. Enbridge uses debt to fund part of its growth program, which includes acquisitions and capital projects.
Sentiment shifted in late 2023 when markets switched from fears of more rate hikes to anticipation of rate cuts. The central banks started to reduce interest rates in the second half of 2024. This provided extra momentum for the rebound in pipeline stocks.
Risks
Markets assume that more rate cuts are on the way. This is likely the case in Canada, where inflation is down to the Bank of Canada’s target, and unemployment has drifted higher in recent months, hinting at a weakening economy. In the United States, the Federal Reserve is expected to cut rates two more times in 2025, but this is down from predictions of four rate cuts just a few months ago. Inflation remains a concern in the U.S., and the job market is holding up well, supported by a robust economy.
Looking ahead, the U.S. Federal Reserve might have to put rate cuts on hold or even raise rates if Donald Trump implements new tariffs that force businesses to pass on the higher expenses to consumers. The Bank of Canada might also have to scale back rate cuts, even if they are warranted, to keep the rate gap between Canada and the U.S. from getting too wide.
Any indication by the U.S. central bank that it will hold rates at the current level or increase them through 2025 would likely put new pressure on pipeline and utility stocks.
Opportunity
Enbridge completed its US$14 billion purchase of three natural gas utilities in the United States last year. The deals make Enbridge the largest natural gas utility operator in North America. Natural gas demand is expected to rise in the coming years as gas-fired power generation expands to provide electricity to artificial intelligence data centres.
Tech companies need to have reliable and scalable power for these facilities. Power grids are already stretched, so standalone power production for the data centres is expected to be common. Enbridge’s extensive natural gas transmission and distribution networks in Canada and the United States position the company to benefit from the jump in gas demand.
Enbridge is working on a $27 billion capital program that will help drive revenue and cash flow growth in the coming years. This should support steady dividend increases. Enbridge raised the payout in each of the past 30 years. Investors who buy ENB stock at the current level can get a 6% dividend yield.
Should you buy now?
Near-term volatility should be expected, given the uncertain outlook for interest rates in 2025 and 2026. A pullback wouldn’t be a surprise in the coming months.
That being said, buy-and-hold investors should be comfortable owning ENB stock at this level for the good dividend yield and could use any material pullback as an opportunity to add to the position.
