Enbridge (TSX:ENB) stock is one of Canada’s most popular high-yield names. It hasn’t delivered much in the way of capital gains over the years, but it sure has rained dividends on its shareholders, with yields between 6% and 8% being common for those buying in the last five years. Enbridge has also raised its dividend over the years, although the 3% annual dividend increases seen lately are a far cry from the big 20% annual hikes seen in the past.
Is Enbridge a buy at today’s prices? The current stock price is low going by the five-year averages. It might be promising, but the earnings trend isn’t so good. In this article, I will examine Enbridge’s high dividend and attempt to determine whether the stock is a buy today.
Earnings miss expectations
Enbridge’s most recent earnings release was mixed, beating analyst estimates on funds from operations (FFO) but missing on earnings per share (EPS) and revenue. The headline metrics included the following:
- $11.3 billion in revenue, down 15.8%
- $1.28 in distributable cash flow per share, down 2.3%
- $0.64 in adjusted earnings per share, up 1.6%
Overall, it was a mixed showing. Revenue declined, which is unusually bad for Enbridge. However, operating cash flows and EPS were relatively unchanged. I don’t think that 2023’s revenue declines will be a long-term trend for Enbridge. Oil prices are rising, and that creates demand for energy transportation. It should help Enbridge gain new transportation contracts, which it typically locks in for very long 10-20-year terms.
Valuation so-so
Despite its declining revenue, Enbridge’s valuation is not all that cheap. At today’s prices, it trades at the following:
- 17 times earnings
- 2.3 times sales
- 1.87 times book value
- 7.2 times operating cash flow
The price-to-cash flow ratio is pretty low. Apart from that, though, these multiples are fairly typical of TSX stocks as a whole. So, Enbridge is not especially cheap compared to its peers. However, its peers are, in many cases, growing their revenue. Enbridge is more “expensive” than its peers when taking that into account. The value proposition here is so-so. Going by historical earnings results, Enbridge is not a good buy, but if higher oil leads to Enbridge locking in more contracts, then maybe the trailing 12-month results will prove to have been anomalous.
Dividend sustainability
The worst part of the analysis for Enbridge pertains to its dividend sustainability. The company has a 127% payout ratio (percentage of profit paid out as dividends), while revenue is declining. This is not a good mix of characteristics. It suggests that Enbridge’s dividend will grow slowly, if at all, going forward. I definitely would not expect 10-20% dividend hikes like the ones this company did in its glory days.
Foolish takeaway
Taking everything into account, I think Enbridge is an “OK” buy today. The company will probably continue delivering its slow and possibly negative capital gains as was historically the case, but its dividend will likely continue being paid. I’m not buying this stock, but it certainly merits a small place in an adequately diversified portfolio.
