Buy, Sell, or Hold: Enerplus
Jun 16th 2012 6:06PM
Updated Jun 16th 2012 6:08PM
When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Enerplus (NYS: ERF) today and see why you might want to buy, sell, or hold it.
With a market cap near $2.5 billion, the Canada-based company is involved in gas and oil exploration and production in North America.
For some people, the main reason to buy into this stock is its dividend -- which is around 16%! That not only tops interest rates you can get at your bank, but it also beats the long-term stock market average -- by a lot.
Then there's the company's business. As my colleague Isac Simon has noted, Enerplus "operates in some of the most lucrative prospects in the oil industry." He continues: "The Western Canada oil sands, the Bakken shale play in North Dakota, and the Marcellus shale play all hold reserves that contribute to a very strong asset base."
First off, remember that astronomical dividend yield of nearly 16%? Well, it may have you drooling, but it also may not last. The company's payout ratio was recently above 300%, meaning that it's paying out more money than it's making. Earnings per share over the past 12 months were $0.25, but the dividend payout per share was $2.11. Also worrisome is that dividend levels are lower now than they were a few years ago. The company pays its dividends monthly, which is a little unusual, as most are paid quarterly. Recent monthly payouts have been between about $0.17 and $0.19 per share, whereas for most of 2008, they were above $0.40. (Interestingly, the company recently began a stock-dividend plan, giving shareholders the ability to receive payments in stock form, at a 5% discount to prevailing prices. This can help the company save money, but it can also dilute the value of shares.)
That might not be so bad, if we expected earnings to rise strongly in the near future. A look at the past few years' of earnings, though, shows them considerably lower in the past few years than they were before that. A glance at the balance sheet shows much more debt than cash, and debt rising slightly as well. Cash flow from operations has been falling, too, and free cash flow is negative.
Then there's the low price of natural gas. This has put pressure on companies' oil operations and has threatened to make some natural gas operations less lucrative. Many natural gas companies, such as Chesapeake Energy (NYS: CHK) , EXCO Resources (NYS: XCO) , and Encana (NYS: ECA) , have reined in their drilling, but inventory levels remain high.
Given the pros and cons of Enerplus right now, it's not crazy to take a wait-and-see approach. You might wait for natural-gas prices to establish a solid upward trend, or for Enerplus to start reporting significant positive earnings for a few quarters in a row. You might also like to see its debt load shrink.
Enerplus isn't necessarily a bad company or stock, but it's caught in some challenging times right now. Over the past five years, it has averaged an annual loss of about 15%, but over the past decade, it has delivered more than 9% in gains annually to shareholders.
I think I'll be holding off on Enerplus, at least for now. After all, there are plenty of compelling stocks out there with more certain futures.
If you're looking for hefty dividend income but are a bit scared of Enerplus, check out our special free report, "Secure Your Future With 9 Rock-Solid Dividend Stocks," which will introduce you to a bunch of compelling stocks.
At the time this article was published Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any company mentioned. Check out her holdings and a short bio. The Motley Fool owns shares of Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.