Is Enbridge Inc.’s (TSX:ENB) Dividend Worth the Risk?

With oil prices continuing to rise, Enbridge Inc (TSX:ENB)(NYSE:ENB) is becoming an even better buy.

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Enbridge Inc (TSX:ENB)(NYSE:ENB) is down around 15% this year as the stock continues to struggle to find momentum. After climbing to more than $47 a share a few months ago, the stock has dropped in price yet again.

Oil and gas stocks have been risky buys at best, especially in Canada, and there’s no better proof of that than what’s happening with Enbridge. The company has good financials and should offer investors a lot of stability, yet it can’t keep the bears away.

The one big positive from the drop in price is that investors have an opportunity to lock-in a dividend yield of more than 6.2% per year. The big question, however, is whether the dividend is safe, and whether it’s worth the risk to invest.

Is the dividend safe?

The first question investors should be asking is whether or not the dividend can be sustainable at its high yield. In the trailing 12 months, Enbridge has generated an earnings per share of $1.49, which well short of the $2.684 it is paying per dividend every year. At first glance, it’s alarming since the payout ratio is over 180% of earnings.

However, oil and gas stocks have a lot of non-cash expenses, such as depreciation, which may weigh down their earnings, so looking at earnings only can be misleading. If we look at the cash flow statement, it can sometimes give us a better indication of what shape a company is in and its ability to pay a dividend.

In the past four quarters, Enbridge has generated over $1 billion in free cash, which is still well short of the $3.2 billion in dividends it has paid during that time. However, in its two most recent quarters, Enbridge has averaged a payout of 58% of its free cash.

While it looks like Enbridge can afford to keep paying its dividend, if we assume that its recent quarters are a good indicator of the future, given that in three of the past five quarters the company has failed to produce positive free cash flow, there could be a strong case for Enbridge to cut its payouts.

However, the company has a strong track record of not only paying a dividend, but also increasing it, so it’s not a move that Enbridge would make lightly.

A cut could be a possibility if the stock continues to struggle, but in the near term I don’t expect to see that happen.

Is Enbridge too risky?

Enbridge has already survived some tough times in the industry, but whether it can continue to stay competitive is the big question. However, with oil prices hitting over US$75 earlier this week, it’s only a matter of time before we see the industry picking up steam again. Investors won’t be able to ignore this stock for much longer, especially once these higher oil prices start translating into stronger financials.

Given Enbridge is trading at only 1.3 times its book value. For investors, this is a bargain that could prove too good to pass up.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

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