Similar to the consumer staple dividend stock analysis series (including CLX [1], CL [2], KMB [3], PG [4], JNJ [5])) I published in October, I am starting a new one on Canadian utilities dividend stocks. Canadian utilities can be quite interesting for both Canadian and US investors as they offer great diversification within their power sources. They show great strengths in both oil (pipelines) and electric power plants. Here’s the list of Canadian companies that will be covered before Xmas:
Emera Inc – EMA
Encana Corp – ECA
Fortis – FTS [6]
Encana (ECA) Business Description:
Encana is a leader in North America for energy production related to natural gas, oil and NGLs. Its activities are related to the exploration, development and production of energy sources above cited. ECA is operating under four divisions:
- Canadian Division
- US Division
- Market Optimization (responsible for sales)
- Corporate & Others (including gains & losses incurred from derivatives financial instruments)
ECA Stock Graph
[8]ECA Dividend Growth Graph
[8]When I look at this graph, I don’t know if I can call ECA a dividend growth stock. After the “golden years of Canadian oil sands” at the beginning of the 2000s ECA’s dividend growth had been hit by a train. After doubling its dividend back in 2007, ECA cut it back by 50% in 2010 and hasn’t touched it since. With such a ridiculous payout ratio (459%!) you can tell that ECA will either finance its dividend or cut it again in the near future.
The Company Ratios and Financial Info:
Ticker ECA
Name Encana Corp
Dividend Metrics
Current Dividend Yield 3.79
5 year Dividend Growth 0.84
1 year Dividend Growth 1.82
Company Metrics
Sales Growth (1 year) -4.54
Sales Growth (5 year) -21.64
EPS growth (5 year) #VALUE!
P/E ratio 35.73
P/E Next Year 27.03
Margins growth -7.15
Payout ratio 459.38
Return on Equity -26.79
Debt to Capital Ratio 0.5
Well… what can I say… Sales growth is down the hole while P/E ratio is through the roof and I don’t even want to mention the dividend payout ratio. Needless to say that ECA doesn’t fit my dividend growth ratios [9].
Encana Upcoming opportunities and dangers:
In my opinion, the most important problem with ECA is its mathematically proven inability to sustain its dividend payout in the upcoming years. This means that either Encana will finance its dividend or either it will have to cut it. Unless… for the most optimistic, Encana shows a huge growth in their sales and profits in the upcoming years.
Since the sales are down for the past 5 years and the margins are under pressure, I’m definitely not optimistic in the case of ECA. I think the company knows it as well since the dividend payout were barely increased over the past 5 years and nothing seems to forecast a significant growth in 2013. ECA is a good example of the difficult transition between the famous oil income trusts to a “real corporation” paying real taxes!
Final Thoughts on Encana
Hum… do I really need to tell you that ECA won’t be part of my portfolio next year? Honestly, the existing dividend yield is not even attractive for me to take the risk of investing in a company with a dividend payout ratio way over 100%. This metric may change overtime but I can already buy better stocks with a higher dividend yield and better growth financial ratios. Just think of the Canadian banks [10] for example ;-).
Disclaimer: I do not hold ECA in my portfolio.
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