Don't Buy Enbridge Inc. (TSE:ENB) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
August 08, 2020
TSX:ENB
Source: Shutterstock

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 3 days. If you purchase the stock on or after the 13th of August, you won't be eligible to receive this dividend, when it is paid on the 1st of September.

Enbridge's next dividend payment will be CA$0.81 per share. Last year, in total, the company distributed CA$3.24 to shareholders. Calculating the last year's worth of payments shows that Enbridge has a trailing yield of 7.3% on the current share price of CA$44.17. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Enbridge has been able to grow its dividends, or if the dividend might be cut.

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. Last year, Enbridge paid out 327% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Enbridge paid out more free cash flow than it generated - 142%, to be precise - last year, which we think is concerningly 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.

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

historic-dividend
TSX:ENB Historic Dividend August 9th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Enbridge's earnings per share have fallen at approximately 6.6% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Enbridge has lifted its dividend by approximately 16% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Enbridge is already paying out 327% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Is Enbridge an attractive dividend stock, or better left on the shelf? Not only are earnings per share declining, but Enbridge is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of Enbridge don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 4 warning signs for Enbridge (2 can't be ignored!) that you ought to be aware of before buying the shares.

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.

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