Today we’ll take a closer look at Enerplus Corporation (TSE:ERF) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
In this case, Enerplus likely looks attractive to investors, given its 3.0% dividend yield and a payment history of over ten years. We’d guess that plenty of investors have purchased it for the income. The company also bought back stock during the year, equivalent to approximately 11% of the company’s market capitalisation at the time. Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.
Explore this interactive chart for our latest analysis on Enerplus!
Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Although it reported a loss over the past 12 months, Enerplus currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.
Last year, Enerplus paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
We update our data on Enerplus every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Enerplus has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. While its dividends have not been hugely volatile, its most recent dividend is still meaningfully below where it was 10 years ago. During the past 10-year period, the first annual payment was CA$2.2 in 2010, compared to CA$0.1 last year. The dividend has fallen 94% over that period.
When a company’s per-share dividend falls we question if this reflects poorly on either external business conditions, or the company’s capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Enerplus has grown its earnings per share at 31% per annum over the past five years.
Conclusion
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Enerplus’ dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. That said, we were glad to see it growing earnings and paying a fairly consistent dividend. In sum, we find it hard to get excited about Enerplus from a dividend perspective. It’s not that we think it’s a bad business; just that there are other companies that perform better on these criteria.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For instance, we’ve picked out 2 warning signs for Enerplus that investors should take into consideration.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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