Yahoo Finance Here's Why We're Wary Of Buying Enbridge Inc.'s (TSE:ENB) For Its Upcoming Dividend
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. You can purchase shares before the 14th of August in order to receive the dividend, which the company will pay on the 1st of September.
Enbridge's next dividend payment will be CA$0.74 per share, on the back of last year when the company paid a total of CA$2.95 to shareholders. Based on the last year's worth of payments, Enbridge has a trailing yield of 6.6% on the current stock price of CA$44.93. 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! We need to see whether the dividend is covered by earnings and if it's growing.
See our latest analysis for Enbridge
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Enbridge distributed an unsustainably high 115% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. It paid out an unsustainably high 258% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.
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. 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 35% per annum for the past five years. Enbridge's dividend was not well covered by earnings, although at least its earnings per share are growing quickly. 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.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Enbridge has delivered 16% dividend growth per year on average over the past 10 years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
Final Takeaway
Is Enbridge worth buying for its dividend? 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 the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
Ever wonder what the future holds for Enbridge? See what the 11 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.
