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Is Enbridge Inc (TSX:ENB) Stock a Buy Despite Lacklustre Long-Term Performance?

The past year has not been kind to Enbridge Inc (TSX:ENB)(NYSE:ENB). Down about 13% year-to-date, the stock has been hit by a number of setbacks, including declining revenue in Q2 and continued equity dilution. However, with a generous dividend yield, the company has many income investors salivating.

Is Enbridge a buy ahead of its next earnings report?

It helps to start by looking at the company’s core operations.

Core operations

Enbridge is an oil and gas transportation company that distributes fuel across Ontario, New Brunswick, Quebec and New York State. This expansive network makes it Canada’s largest natural gas pipeline network.

So far so good. It’s always beneficial for a company to have a dominant position in its market. The problem for Enbridge is the market it finds itself in: natural gas pipelines.

The energy pipeline industry been beset by problems recently, to say the least. Between the many delays in TransCanada’s Keystone XL project and the political controversy surrounding Trans Mountain, energy transportation has been disproportionately affected by politics compared to other sectors.

Fortunately, Enbridge is mainly fueling its expansion by buying up established companies rather than building new pipelines. But companies in this industry are always vulnerable to unexpected regulatory setbacks.

Big acquisition news

Enbridge has been on a mild acquisition spree in the past decade, having purchased Midcoast Energy Partners for $170 million in 2017, along with the Sarnia Photovoltaic Power Plant in 2009. The most recent acquisition news from Enbridge was that it would be spending $4.7 billion (in cash and stock) to purchase all outstanding shares of Enbridge Income Fund Holdings  (TSX:ENF). Enbridge already owns a large stake in this holding company, which invests in North American energy infrastructure.

Upping that stake may be a good idea: Enbridge Income is priced lower than Enbridge (in terms of earnings and book value), and its quarterly revenue growth is considerably higher.

A generous dividend

Finally, as most income investors are aware, Enbridge pays a generous quarterly dividend of about 6%. That’s a lot of income, but investors should note two things.

First, Enbridge’s stock is down about 13% year to date. This loss is larger than the 6% yield you’ll get by investing in Enbridge now. Of course, past performance doesn’t indicate future performance, and since Enbridge’s financials are pretty good (aside from last quarter’s revenue growth), we may expect its shares to rise. That said, Enbridge stock is not just down year-to-date, it’s also down over the past 12 months and barely up over five years.

Second, Enbridge has a massive dividend payout ratio. In the trailing 12-month period, the company has earned $1.49 per share, while paying out $2.68 in dividends! This gives a ratio of 180% of earnings, which is not sustainable. However, as Fool contributor David Jagielski points out, oil and gas companies have significant depreciation costs, which means that looking at just earnings can be misleading.

Nevertheless, you’re going to have to ask yourself how sustainable that dividend is if you’re buying Enbridge shares for income.

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Fool contributor Andrew Button has no position in any of the stocks mentioned. Enbridge is a recommendation of Stock Advisor Canada.

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