Key Points
GAAP earnings point the wrong way for both.
Energy Transfer’s roughly 7% yield looks well covered with cash flow.
Enbridge also amply covers its dividend with cash.
Energy Transfer's (TXSE:ET) third-quarter earnings per unit came in about 20% below analysts' expectations. A few days later, Enbridge (NYSE:ENB) reported a profit that nearly doubled from a year ago. If you judged these two pipeline giants by those headlines alone, you'd probably think one had a strong quarter, while the other did not. That would be a mistake because neither number tells you the real story, especially when it comes to the safety of their high-yielding dividends.
Here are the numbers that show why I'm not worried about these high-yielding dividend stocks.
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Cash flow, not earnings, is what matters for pipeline stocks
One common mistake many investors make when analyzing pipeline stocks is putting too much emphasis on their reported earnings per share. That number isn't a true representation of the underlying earnings these companies generate. That's because pipelines and other energy infrastructure assets are capital intensive. As a result, pipeline companies often record significant depreciation charges that lower reported earnings. Additionally, gains and losses on asset sales or commodity hedges can meaningfully distort reported earnings.
A better measure of pipeline profitability is distributable cash flow (DCF). This is the cash generated by these businesses that they could distribute to investors via dividends. Here's the math for these pipeline giants
From well short to room to spare
Enbridge reported GAAP earnings of 1.3 billion Canadian dollars ($920 million), or CA$0.59 per share ($0.42), in the third quarter, nearly double the year-ago period. Despite nearly doubling, Enbridge's reported earnings were still below the CA$0.97 per share ($0.69) it pays in dividends each quarter.
Enbridge's DCF, on the other hand, is more than twice the size of its reported earnings at CA$2.7 billion ($1.9 billion), a nearly 4% year-over-year increase. That puts its dividend payout ratio at 79%. It's an even more comfortable 66% based on the midpoint of the company's 2026 guidance range, well within its 60%-70% target range. That puts its nearly 6%-yielding dividend on a much firmer foundation.
That conservative payout ratio enables Enbridge to retain excess cash to reinvest in the growth of its operations. The company generates CA$5 billion to CA$6 billion ($3.6 billion to $4.3 billion) in post-dividend free cash flow each year. Enbridge can fund over CA$10 billion ($7.1 billion) in new investments each year by adding its additional balance sheet capacity while remaining within its targeted leverage ratio range. This robust investment capacity supports its expectation of growing its DCF per share by around a 5% annual rate, which should support similar dividend growth. Enbridge has increased its payout for 31 straight years (in Canadian dollars).
From not enough to an abundance
We see a similar story at Energy Transfer. The master limited partnership (MLP) reported GAAP earnings of $1.1 billion, or $0.33 per unit, missing the analysts' consensus estimate of $0.41 per unit by nearly 20%. Like Enbridge, Energy Transfer's reported earnings were below its current distribution level ($0.3425 per unit).
However, its DCF was much higher at $2.5 billion, a 33% increase from the prior year. That was more than double what it distributed to unit holders ($1.2 billion), putting its more than 7%-yielding payout on a much firmer foundation.
Energy Transfer's robust cash flow supports its continued expansion. The MLP plans to invest about $5.5 billion into expansion projects this year and another $7 billion in 2027. These investments should support 3% to 5% annual distribution growth. Energy Transfer has raised its payout for 20 straight quarters.
Safer than the headline numbers suggest
Reported earnings can make the high-yielding dividends of pipeline stocks such as Enbridge and Energy Transfer seem at risk of a reduction. However, those numbers don't show the true underlying cash-generating capabilities of these companies. When you look at their cash flows, their payouts are on much more sustainable foundations. It's why I'm not worried about either of their high-yielding dividends.
Matt DiLallo has positions in Enbridge and Energy Transfer. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.