Don't Buy Enbridge Inc. (TSE:ENB) For Its Next Dividend Without Doing These Checks
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. 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 12th of May, you won't be eligible to receive the dividend, when it is paid on the 1st of June.
The company's next dividend payment will be CA$0.89 per share, on the back of last year when the company paid a total of CA$3.55 to shareholders. Last year's total dividend payments show that Enbridge has a trailing yield of 6.6% on the current share price of CA$53.43. 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! 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 typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Enbridge paid out 290% 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. 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. It paid out 102% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
Cash is slightly more important than profit from a dividend perspective, but given Enbridge's payments were not well covered by either earnings or cash flow, we are 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 falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Enbridge's earnings per share have dropped 6.5% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Enbridge has delivered an average of 12% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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 a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
Final Takeaway
Should investors buy Enbridge for the upcoming dividend? 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. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. Bottom line: Enbridge has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
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. Our analysis shows 4 warning signs for Enbridge that we strongly recommend you have a look at before investing in the company.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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