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Enbridge is experiencing renewed momentum following the recent interest rate cuts by the Bank of Canada. Those who missed the recent bounce may wonder if ENB stock remains undervalued and suitable for inclusion in a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
Enbridge (TSX:ENB) Share Price
Enbridge's stock peaked at $59 in June 2022 but subsequently declined, primarily due to interest rate hikes in both Canada and the United States. The share price fell to as low as $43 last fall, before gaining traction again as expectations of rate cuts in 2024 grew.
The upward trend observed since early October is anticipated to persist. The Bank of Canada has already reduced rates twice in 2024, by a total of 0.5%. Economists broadly foresee the U.S. Federal Reserve beginning to cut rates in the near future, with both central banks potentially extending these reductions through 2025 to manage a soft landing for the economy.
High interest rates increase borrowing costs for companies like Enbridge, which utilizes debt to support growth initiatives. Enbridge has been active in acquisitions and is currently advancing a $25 billion capital program, which will expand its asset base. The company is also finalizing a $14 billion acquisition of three U.S. natural gas utilities. Lower interest rates will reduce debt expenses, allowing more cash to be allocated towards dividends or debt reduction. This reduction in borrowing costs could also influence decisions regarding new growth projects.
Outlook
Earnings before interest, taxes, depreciation, and amortization (EBITDA) are projected to grow at an average annual rate of around 5% over the medium term as new assets become operational. Enbridge plans to invest approximately $19 billion in projects from 2024 to 2026.
Dividends
Enbridge has consistently increased its dividend for the past 29 years. At the current share price of approximately $51, the stock offers a dividend yield of around 7%. Even if the share price remains at its current level, it provides a substantial annual return.
Distributable cash flow (DCF) is anticipated to grow by 3% annually through 2026 and by about 5% from 2027 onward. This growth in DCF should support continued dividend increases within a similar range.
