Enbridge (TSX:ENB)(NYSE:ENB) is one of Canada’s top dividend stocks, known for its long-term stability and high yield. But a rapid ascent this year may have some income investors wondering if the rally is overextended, and whether the stock may have become too expensive to buy right now.
Driven by a broader surge in oil and gas equities, the pipeline giant has climbed an impressive 25% over the past 12 months. This upward momentum has pushed the shares to an all-time high, bringing its dividend yield down to just 5% in the process. While that's still fairly high, it's not as high as it has been in the past.
However, investors need to look under the hood before buying into the energy momentum. Unlike traditional oil producers, Enbridge operates a highly stable infrastructure business. This means it will not generate a massive windfall of extra profits from surging commodity prices the way pure-play producers do. Despite this utility-like business model, the market has priced it like a high-flying growth stock, pushing its price-to-earnings ratio to nearly 27.
At these levels, the valuation is getting exceptionally expensive. The primary risk for investors who buy the stock today is that if oil prices retreat or the current excitement surrounding the oil and gas sector wanes, the stock could be highly vulnerable to a significant correction. A market cool-down could easily send the shares tumbling below the $60 mark.
Ultimately, while Enbridge remains a high-quality company with dependable cash flows, the current entry price reflects a steep premium. The stock is simply too pricey to justify buying at its current levels, and investors may be better off waiting for a drop in value before buying Enbridge stock.
