Enbridge (TSX:ENB) stock has gotten beaten down severely in the last 12 months. Over that time period, it has declined about 18% in price, while the TSX Composite Index has risen 0.78%. It has been a period of serious underperformance for ENB stock.
However, thanks to the decline in its stock price, ENB now has a higher yield than it had in the past, while also having a cheaper valuation. The stock has, if anything, gotten more interesting. In this article, I will explore Enbridge stock to help you determine whether buying it today after its recent sell-off is a good idea.
Source: Getty Images
An 8.3% yield
One thing that Enbridge stock definitely has going for it right now is a high yield. As its stock price has declined to $43, its yield has risen, approaching double digits. Enbridge’s quarterly dividend is $0.89 per share. That’s $3.56 per year. At a $43 stock price, that gives us an 8.27% annualized yield. If the stock price falls further then the yield will go higher, assuming management doesn’t have to cut the dividend.
Some would say that ENB’s management will have to cut the dividend eventually. Enbridge is highly leveraged, meaning that the company has a lot of debt. The higher interest rates go, the more costly this debt becomes. First, when interest rates rise, variable rate debt immediately starts incurring higher interest expenses. Second, eventually even fixed rate debt needs to be refinanced, and that comes with higher interest expenses later on down the road. Thus, if yields keep rising higher, there is a chance that Enbridge will have to cut its dividend, and lose the high yield that it enjoys today.
High dividend growth
Another thing that Enbridge has going for it, apart from its currently high yield, is high dividend growth. Over the years, Enbridge’s management has hiked the dividend many times. Over the last three years, they have hiked the dividend by 5.2% per year. Over the last five years, they’ve hiked it by 7.5% per year. Over the last 10 years, they’ve hiked it by 12.7% per year. That’s a lot of dividend hiking taking place in just 10 years. And if management can successfully navigate this high rate environment, they will be able to do more hikes in the future. I’d say that investors should probably expect a slower pace of hikes going forward, but some growth could occur.
Dividend sustainability
One negative for Enbridge stock is its dividend sustainability. Going by the payout ratio, ENB’s dividend appears to be poorly covered. Enbridge pays out about 120% of its earnings as a dividend. Looking at no other factors, that would tend to suggest that, unless the company can achieve some dividend growth, its dividend payout will have to be cut. On the other hand, the payout ratio based on free cash flow is slightly less than 100%, and the payout ratio based on distributable cash flow is just 72%. On the whole, I don’t think that Enbridge is going to start cutting its dividend payouts tomorrow. However, I think investors will have to expect the pace of dividend increases to be slower in the future compared to the recent past.
