When an ultra-high yield stock hits a 52-week low, it’s hard not to notice. If a stock has a high yield, even when it’s at relatively high prices, it’s going to have an even higher yield at lower ones. During particularly intense market crashes, investors sometimes get opportunities to buy shares in high-quality companies at yields of 10% or more. In this article, I will look at one TSX energy stock that just recently hit a 52-week low and is now sporting a higher yield because of it.
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Enbridge
Enbridge (TSX:ENB) is a Canadian pipeline stock that has a 7.7% dividend yield and hit a 52-week low of $45.3 about two weeks ago. The stock got beaten down because of a string of disappointing earnings releases. Although oil prices have been rising lately, Enbridge missed on revenue while delivering negative earnings growth in its most recent quarter. As you might expect, the markets sold off ENB stock on the disappointing news.
Now, given that I just told you ENB’s most recent earnings release was disappointing, you might expect me to say that its stock is a bad bet at today’s prices. Actually, that’s not my opinion. The stock’s price has fallen 13% this year, which seems like enough of a correction to adjust to an earnings release in which revenue was a little off and earnings per share were slightly ahead of expectations.
On top of that, there is the fact that we are currently in the midst of one of the healthiest oil markets in recent memory. Oil prices are rising, and that means that there’s a lot of demand for the products that Enbridge’s clients sell. Enbridge doesn’t sell oil directly, but the fact that its customers are clamouring to get oil to market means that it has some negotiating power in situations where, say, long-term contracts have to be signed.
Enbridge’s dividend sustainability
As we’ve seen, Enbridge’s recent earnings release was not that bad, and the company should be able to prosper in the market environment we’re seeing in the third quarter. It all looks like a compelling package. However, Enbridge does have some issues with dividend sustainability. Its payout ratio is 188% going by GAAP (generally accepted accounting principles) earnings or 124% going by adjusted earnings.
The company says that its payout ratio, using distributable cash flow (DCF), is only 72% — that would indicate a sustainable dividend. However, DCF is a non-GAAP (i.e., unconventional) cash flow metric that ENB is free to calculate how it sees fit. There could be some dividend sustainability issues here.
Is it a buy now?
Taking everything into account, is ENB stock a buy now?
Based on the conflicting signals, I’d say that Enbridge stock is a buy within the context of a highly diversified portfolio but is not the kind of stock you’d want to have at a massively outsized weighting. There are enough issues with dividend sustainability that investors probably won’t have a very large dividend hike to look forward to next year. However, the current dividend should at least continue being paid, which, at a 7.7% yield, is an enticing prospect.
