The Fed just lowered interest rates. Here is 1 energy stock to buy.

In a widely expected move, the Federal Reserve cut interest rates this week. It cut the federal funds rate by 0.5%, much higher than the quarter-point cut anticipated by many. The Fed has signaled that it will likely continue to cut interest rates in the coming months.

Lower rates should be a boon for the energy sector. The industry tends to borrow heavily to finance expansion projects and acquisitions. As rates fall, interest expense should fall. Additionally, higher yielding dividend stocks (which are quite common in the energy sector) tend to be more rate sensitive. As rates fall, investors are willing to accept a lower dividend yield, which increases the stock price.

Many companies in the sector should benefit from the rate cut. north america PIPE and utility giant Enbridge (ENB -0.32%) is a top beneficiary. Here’s why that makes it seem a great one stock to buy now.

Cheaper financing

Enbridge is one of the largest energy infrastructure companies in North America. Works oil and gas pipelines and natural gas utilities, and produces renewable energy. The company spends billions of dollars every year to maintain and expand its infrastructure.

They typically finance their business with long-term, fixed-rate debt. However, it has some exposure to interest rates as about 10% of its debt is variable rate. As rates fall, the interest expense on this debt will fall.

Meanwhile, Enbridge typically issues new debt every year to refinance existing loans and finance new investments. It will now cost less to refinance the debt and borrow additional money than it would at higher rates.

Lower loan rates TO it also contributes to the realization of several economically viable expansion projects. Enbridge is financing its expansion with a combination of debt and equity. As the cost of debt falls, it would increase the yield on its expansion projects, which could push some of them as attractive investment opportunities.

A probably higher valuation

Enbridge currently offers a dividend yield of over 6.5%. This high yield is partly due to the company’s lower valuation, as income investors wanted a higher yield when rates were higher. The company expects to generate between $3.97 and $4.27 per share in distributable cash flow this year. With its share price recently around $40 apiece, Enbridge is trading 10 times the earnings.

It is much cheaper than the broader market due to its slower growth rate and higher dividend yield. The S&P 500 it trades at nearly 24 times earnings (and a dividend yield of less than 1.5%).

However, with rates falling, investors will be willing to pay more for income-generating investments like Enbridge. This should cause the market’s dividend yield to fall as its valuation rises.

Value-Added Catalysts

Interest rates aside, Enbridge already offers investors a strong value proposition. The company expects to grow its distributable cash flow per share by approximately 3% annually through 2026 and by 5% per year thereafter. Fueling this outlook is its massive slate of expansion projects and investment capacity to make increased acquisitions.

This outlook gives Enbridge confidence that it has enough fuel to continue growing its dividend. He could increase his pay by up to 5% annually over the medium term. This would continue the company’s long streak of increasing its payout, which is currently up to 29 years.

Fuel to produce robust total yields

With a current dividend yield of more than 6.5% and its earnings growing by about 3% annually in the near term, Enbridge should have the fuel to deliver an average annual total return of about 10%. Its total return potential could accelerate to around 12% annually after 2026.

This does not take into account the upside from falling interest rates, which could boost cash flow, growth prospects and valuation. This catalyst could help drive even higher total revenues from here. This additional upside potential makes Enbridge an even better buy right now.