Enbridge Inc (TSX: ENB) is one of the best-known high-yield Canadian stocks. With a 7.2% dividend yield, it pays out $7,200 per year on every $100,000 invested. Of course, companies sometimes cut their dividends: the $7,200 is not guaranteed. But assuming Enbridge’s past dividend track record can be maintained into the future, then the 7.2% yield is likely trustworthy.
The million-dollar question is whether it can be maintained. Enbridge famously pays out more in dividends than it makes in profit. This calls into question whether its current dividend can be maintained. Although Enbridge’s dividend track record is great, it’s always possible for a very long-term trend to reverse. In this article, I will explore Enbridge’s 7.2% dividend yield and whether investors buying today can trust it.
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Enbridge: operations
The first thing we need to look at when analyzing Enbridge’s 7.2% dividend yield is the company’s operations.
Enbridge is a pipeline company, which means that it transports oil for its customers through a network of pipes. Its pipeline system is the largest in North America, with over 30,000 kilometres of pipe. The company also functions as a natural gas utility, supplying 75% of the gas consumed in Ontario.
Enbridge’s operations allow it to lock in long-term revenue. Pipeline contracts are typically for long periods of time. Recently, Enbridge signed agreements with its customers that locked them into 7.5-year contracts. That’s nearly another decade of revenue that Enbridge can now count on, unless some of its customers go out of business. Likewise with natural gas utilities: another resilient business with stable long-term earnings.
Recent earnings
Having looked at Enbridge’s operations, it’s time to turn to its most recent quarterly earnings release.
In its most recent quarter, Enbridge delivered:
- $2.6 billion in GAAP earnings, down 55%.
- $2.8 in adjusted earnings per share, up 2.6%.
- $11.2 billion in cash from operations, up 20%.
- $11 billion in distributable cash flow, up 10%.
Overall, not a bad showing. GAAP earnings went down, but all of the cash flow metrics went up. Cash flows are more relevant to dividend-paying ability than earnings are, so this was arguably a strong quarter for Enbridge.
Payout ratios
Now we get to the most unflattering part of the analysis for Enbridge:
Its payout ratios.
A company’s “payout ratio” is the percentage of its profit that it pays out as dividends. The higher it is, the less sustainable the dividend is. Currently, Enbridge’s payout ratio is very high.
You can use different profit metrics to calculate a company’s payout ratio. An earnings-based payout ratio is dividend/earnings; a free cash flow-based payout ratio is dividend/free cash flow. Going by GAAP earnings, ENB’s payout ratio is 297%. Going by adjusted earnings, it’s 123%. Going by free cash flow, it’s 104%. All of these payout ratios are well above 100%, so Enbridge’s dividend is not looking the most sustainable right now. But, on the other hand, most pipelines have high payout ratios, and the industry has survived despite that. I would say that owning Enbridge right now is not a crazy idea.
