Do Enbridge shares really have a 140% payout?

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It’s hard to find a list of the best Canadian dividend stocks that haven’t Enbridge (TSX:ENB)(NYSE:ENB) above.

The massive energy giant with a market capitalization of around $110 billion is a great passive income generator for several reasons.

In addition to being one of Canada’s largest blue-chip stocks and doing a crucial business for the North American economy, the company is also a cash cow, consistently generating billions of dollars in free cash flow.

It’s no surprise, then, that Enbridge is one of Canada’s oldest dividend aristocrats – stocks that increase their dividends every year. Currently, Enbridge is on a 27-year streak of dividend increases.

But with the stock’s trailing 12-month earnings per share (EPS) at just $2.42 and its annual dividend of $3.44, does that mean Enbridge actually has a payout ratio of 140? %, which would be highly unsustainable?

Enbridge dividend and payout ratio

While taking Enbridge’s annual dividend and dividing it by its 12-month EPS shows its payout ratio is 140%, that’s not quite an accurate number.

The majority of companies use EPS to calculate their payout ratios. However, due to new accounting rules, with some stocks like Enbridge, it is actually more accurate to base the payout ratio on different numbers.

Thus, rather than using earnings per share as a method of assessing dividend stability, Enbridge instead uses distributable cash (DCF). Every company is different, but you can usually tell which metrics are most important and which internal metrics management reviews by reading a company’s financial statements.

So when you use DCF rather than EPS to gauge the stability of Enbridge’s dividend, the stock actually has an expected payout ratio this year of 63-66% based on its DCF forecast of 5 $.20 to $5.50 per share.

A payout ratio of around 65% is much more attractive. This gives Enbridge shares a significant margin of safety and sits right in the middle of Enbridge’s target payout ratio, which is between 60% and 70% of DCF.

Therefore, while the stock may appear to have an unsustainable dividend at first, its conservative payout ratio and 27-year dividend growth streak show that Enbridge is one of the best dividend-paying stocks to buy. But is it worth an investment today?

Should you buy Enbridge stock now?

Although many stocks have sold off significantly this year, Enbridge shares offer much less of a discount, trading just 10% off their highs. This is both positive and negative for investors.

On the one hand, Enbridge’s resilience shows what a high-quality stock it is and how well it can protect your capital even as economic uncertainty mounts. On the other hand, the fact that you cannot buy it at a deep discount means that there are several other stocks to buy that offer more value today.

Nonetheless, if you’re looking for a reliable dividend-paying stock that can earn you attractive passive income, or if you’re underweight the energy sector, you can still consider Enbridge today.

Even though it’s not trading at the most attractive discount, it still offers attractive value. Not only does its steadily growing dividend yield around 6.4%, its forward price-to-earnings ratio of 17.8x is actually below its five-year average of 18.3x.

Therefore, if you consider Enbridge shares for their incredible dividend yield, it is definitely one of the best companies you can buy and hold for years.

Sallie R. Loera