Enbridge (TSX:ENB) and Canadian Utilities (TSX:CU) are two of Canada’s favourite dividend stocks. One is a pipeline company that also operates as a natural gas utility; the other is a pure-play utility. As is typical for the industries these companies operate in, both Enbridge and Canadian Utilities have high yields: 7.8% for ENB and 6% for CU. Both of these yields are very high, so if you’re looking for income, these stocks would be a place to start exploring. However, both stocks are subject to various risks that could result in shareholders not actually receiving the dividend income they expect.
In this article, I will explore the various risks that ENB and CU are exposed to, as well as their respective merits, so you can decide which stock is right for your portfolio.
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The case for Enbridge
A case for Enbridge can be built on the fact that the company is indispensable to North America’s economy. The company ships about 30% of the oil shipped in North America. If a company like this ran into serious financial problems, it would likely receive government support; the consequences of it going bankrupt would be too devastating for the government to just let it happen. The company’s long-term growth and profitability track record has been pretty good. Over the last 10 years, the company has grown its earnings per share (EPS) by 17.7% per year on a compounded basis.
That’s pretty good, although the growth in more recent years has not been as good: in the trailing 12-month period, revenue is down 18% (though earnings are still rising). One risk investors should keep in mind with Enbridge is the risk of it having to pay out billions of dollars re-routing one of its pipelines that goes through Wisconsin. Enbridge has been ordered by a judge to carry out this capital expenditure. If the company can’t win on appeal, then it will have a major cost on its hands.
The case for Canadian Utilities
A case for Canadian utilities can be built on the company’s dividend safety. CU pays out only 82% of its earnings as dividends, while Enbridge pays out over 100%. So, CU’s dividends are more supported by profit than Enbridge’s are.
Also, CU’s revenue is far less volatile than Enbridge’s. In the last 12 months, the company’s revenue has been down by about 1%, which is not a positive but is much less bad than Enbridge’s 18% decline. Utilities, in general, tend to have stable revenue, as they provide an essential service on a recurring monthly basis. They also typically face little competition.
A major risk for Canadian Utilities is debt. The company has $10 billion in net debt compared to $6.9 billion in shareholders’ equity. That’s a debt-to-equity ratio well above 100%, which isn’t a positive. More fundamentally, thanks to rising interest rates, the cost of CU’s debt has increased. So, be on the lookout for debt and interest-related issues if you buy CU stock.
Foolish takeaway
All things considered, I find ENB stock and CU stock about evenly matched. They’re both high-yielders with very leveraged balance sheets that usually operate without issues because they are essential services. If you buy either one, you’ll probably collect the dividend but not much else.
