Dividend Investors: Don't Be Too Quick To Buy Enbridge Inc. (TSE:ENB) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Enbridge Inc. (TSE:ENB) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Enbridge's shares on or after the 14th of February, you won't be eligible to receive the dividend, when it is paid on the 1st of March.

The company's next dividend payment will be CA$0.9425 per share, on the back of last year when the company paid a total of CA$3.66 to shareholders. Looking at the last 12 months of distributions, Enbridge has a trailing yield of approximately 5.9% on its current stock price of CA$63.51. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Enbridge can afford its dividend, and if the dividend could grow.

See our latest analysis for Enbridge

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 123% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Enbridge paid out more free cash flow than it generated - 116%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given Enbridge's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see Enbridge's earnings per share have risen 15% per annum over the last five years. It's great to see earnings per share growing rapidly, but we're disturbed to see the company paid out 123% of its earnings last year. Unless there are extenuating circumstances, we feel this is a clear concern around the sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Enbridge has increased its dividend at approximately 10% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

Is Enbridge an attractive dividend stock, or better left on the shelf? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Enbridge.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Enbridge. For example, we've found 2 warning signs for Enbridge that we recommend you consider before investing in the business.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.