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Buy Alert: Enbridge Stock Is Trading Near Lows

Red siren flashing
Image source: Getty Images.

Written by Puja Tayal at The Motley Fool Canada

Enbridge (TSX:ENB) stock is trading near its December 2021 lows. Why has the stock been in red throughout the year? Should you be worried about this dip or be buying in this dip? The answer lies in knowing the why. The stock is falling on industry weakness and not fundamental issues.

Why is Enbridge stock falling? 

Being a market leader, Enbridge is prone to industry weakness. And don’t forget that Canada exports more than 99% of its oil output to the United States. Hence, Enbridge is also affected by America’s economic situation. When economic activity slows in America, it consumes less oil and gas. Moreover, the energy requirement is low during summer. A seasonal dip between July and October is normal.

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But what has suddenly got pipeline investors worked up are the Fed rate hikes and the credit ratings downgrade of U.S. banks. The inverted yield curve, rating downgrade, and falling profit margins are all early signs of a recession.

Moreover, many utility and energy companies announced organizational changes. For instance, Algonquin Power & Utilities decided to sell its power business and focus on utilities. TransAlta Renewables is merging with the parent TransAlta. They took this step after facing a significant dip in profits.

Even large-cap pipeline rival TC Energy decided to spin off its oil pipeline business. When a direct rival shocks the market, investors become bearish in the industry.

Enbridge is a stock to buy the dip 

As Warren Buffett says, “be greedy when others are fearful.” But this quote only applies to stocks that have the ability to recover from a market downturn and return to normal business. Many companies perish in a recession as they run out of cash. Hence, before being greedy and buying a falling stock, look at the company’s balance sheet and cash availability.

2022 was a strong year for Enbridge as rising demand and supply chain disruption created a global oil crisis. Its distributable cash flows (DCF) surged 2% to $5.96 billion in the first half. It earned 83% of its $3.55 dividend per share in the first half, with a DCF of $2.94 per share. Even if a recession hits and industrial oil and gas consumption falls, Enbridge has sufficient cash to pay dividends and service debt.

Enbridge has faced worse recessions like the one in the 1990s, 2008, and the pandemic (in which even Enbridge’s oil transmission volumes declined). The winter season could bring some pace in the stock price as energy demand increases.

Opportunity to lock in 7.5% dividend yield for a long time 

Don’t miss this opportunity to buy into others’ fears. Enbridge’s below $48 stock price has increased its dividend yield to 7.5%, which is higher than its average yield of 6.5%.

Scenario #1: If you invest $5,000 today, you can lock in $376.3 in annual dividend income. How? The stock is trading at $47.18. A little over $5,000 can buy you 106 shares of Enbridge, each paying a $3.55 annual dividend.

Scenario #2: If you invest on any other day when the stock is trading at its average price of $53, you can only buy 94 shares with $5,000. These shares will pay you $333.7 in dividend income.

Here is an opportunity to earn a $42.6 extra dividend annually for no additional cost. If you use this extra money to buy more shares of Enbridge or other dividend stocks, you can compound the opportunistic income.

How to compound your opportunistic income 

ENB Stock Price

ENB Share count

Total Share Count

ENB Dividend per share

Total dividend
Scenario #1

Total dividend
Scenario #2

Difference

$47.18

106.00

106.00

$3.55

$376.30

$333.70

$42.60

$53.00

7.10

113.10

$3.66

$413.55

$366.73

$46.82

$53.00

7.80

120.90

$3.77

$455.34

$403.80

$51.55

$53.00

8.59

129.49

$3.88

$502.33

$445.46

$56.87

$53.00

9.48

138.97

$4.00

$555.27

$492.41

$62.86

Let’s assume you invest $5,000 today and reinvest all other dividend income to buy ENB shares at $53. The extra $42.6 dividend will compound to $62.86 in five years and $107 in 10 years, assuming Enbridge keeps growing its dividend at a 3% average annual rate.

You will pat your back for going against the tide and buying the stock at its dip.

The post Buy Alert: Enbridge Stock Is Trading Near Lows appeared first on The Motley Fool Canada.

Should You Invest $1,000 In Algonquin Power and Utilities?

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Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in August 2023... and Algonquin Power and Utilities wasn't on the list.

The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 26 percentage points. And right now, they think there are 5 stocks that are better buys.

See the 5 Stocks * Returns as of 8/16/23

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Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

2023