Enbridge (TSX:ENB)(NYSE:ENB) stock had an 8.85% yield as of this writing. Just a stone’s throw away from 9%, it’s one of the highest yields among large-cap TSX stocks.
In fact, it’s so high that you might be inclined to question it. Usually, when a stock’s yield approaches the double digits, investors wonder whether it’s sustainable. Could the payout ratio be too high? Is the stock being beaten down for a good reason? These are logical questions to ask. However, Enbridge’s dividend looks like it’s safe for at least the near future, as I’ll show below.
Phenomenal dividend growth
One factor powering Enbridge’s high yield is its historical dividend growth. The payout has risen by 15% a year over the past five years, and it rose by 9.8% this year. That’s a phenomenal dividend-growth track record. To an extent, it has been supported by equally solid earnings growth. From 2016 to 2019, ENB’s diluted EPS grew from $1.93 to $2.63. That’s enough earnings growth the keep dividends growing without an excessive payout ratio — as we’ll see in a moment.
Stock price taking a beating
Another factor contributing to ENB’s massive yield is the fact that its stock has been taking a beating. Ever since the 2015 oil price collapse, ENB stock has been going down. As of this writing, it was down 29% over a five-year period. That’s actually not TOO bad of a beating for a Canadian energy stock in that period. But it’s worse than the TSX overall. When you’ve got a dividend rising and a stock price collapsing at the same time, you’ve got a recipe for a high yield. Surprise, surprise — that’s what we’ve seen with Enbridge.
Now, you might ask yourself whether Enbridge’s stock is declining for a good reason. If every beaten down ultra-high-yield stock was what it appeared to be, we’d all be headed for early retirement.
But in fact, it looks like Enbridge has been doing pretty well as a business. Recall above, diluted EPS grew from $1.93 to $2.63 over four years. In the same period, EBITDA and gross profit both doubled. Free cash flow went from -$44 million to $3.7 billion. So, it seems likely that Enbridge stock is being beaten down, because of the stigma against Canadian energy stocks, rather than its fundamentals. The business itself is, by all accounts, doing well.
What about the payout ratio?
Now we get to the million-dollar question: the payout ratio.
This is the one area where Enbridge may be fairly weak. Going off of net income, the payout ratio is likely over 100%. In 2019 at year’s end, it was 1.05% — that is, $6.125 billion in dividends on $5.827 billion in earnings. That looks a little iffy, although it’s not as bad as the 329% you may have seen from third-party data providers. That figure comes from trailing 12-month earnings, which factors in a first quarter that included a lot of non-cash items.
Going by the company’s own calculations, net income isn’t relevant. Enbridge tends to calculate its payout ratio off of cash flow, which more accurately reflects the ability to pay dividends. Going off cash from operations, we get $9.3 billion in 2019, more than enough to pay the $6.125 billion in dividends. So, perhaps ENB’s payout ratio isn’t as bad as it looks.
