Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Enbridge Inc. (TSE:ENB) is about to go ex-dividend in just 4 days. If you purchase the stock on or after the 13th of February, you won’t be eligible to receive this dividend, when it is paid on the 1st of March.
Enbridge’s next dividend payment will be CA$0.81 per share, on the back of last year when the company paid a total of CA$2.95 to shareholders. Looking at the last 12 months of distributions, Enbridge has a trailing yield of approximately 5.8% on its current stock price of CA$56.13. If you buy this business for its dividend, you should have an idea of whether Enbridge’s dividend is reliable and sustainable. So we need to investigate whether Enbridge can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Enbridge paid out 100% of its earnings, which is more than we’re comfortable with, unless there are mitigating circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 170% of its free cash flow as dividends, which is uncomfortably high. We’re curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
As Enbridge’s dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That’s why it’s comforting to see Enbridge’s earnings have been skyrocketing, up 39% per annum for the past five years. Earnings per share have been growing rapidly, but the company is paying out an uncomfortably high percentage of its earnings as dividends. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Enbridge has delivered 16% dividend growth per year on average over the past ten years. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Is Enbridge an attractive dividend stock, or better left on the shelf? While it’s nice to see earnings per share growing, we’re curious about how Enbridge intends to continue growing, or maintain the dividend in a downturn given that it’s paying out such a high percentage of its earnings and cashflow. It’s not an attractive combination from a dividend perspective, and we’re inclined to pass on this one for the time being.
Curious what other investors think of Enbridge? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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