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Encana (ECA) 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. ECA is operating in four divisions:

  • Canadian Division
  • U.S. Division
  • Market Optimization (responsible for sales)
  • Corporate and Others (including gains and losses incurred from derivatives financial instruments)

ECA Stock Graph

(click to enlarge)

ECA Dividend Growth Graph

ECA dividend growth

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

TickerECA
NameEncana Corp
Dividend Metrics
Current Dividend Yield3.79
5 year Dividend Growth0.84
1 year Dividend Growth1.82
Company Metrics
Sales Growth (1 year)-4.54
Sales Growth (5 year)-21.64
EPS growth (5 year)#VALUE!
P/E ratio35.73
P/E Next Year27.03
Margins growth-7.15
Payout ratio459.38
Return on Equity-26.79
Debt to Capital Ratio0.5

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.

Encana's 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 Encana will either finance its dividend or 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 five 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 payouts were barely increased over the past five years and nothing seems to forecast 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

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 over time, but I can already buy better stocks with a higher dividend yield and better growth financial ratios. Just think of the Canadian banks, for example.

Disclaimer: I do not hold ECA in my portfolio.

Source: Encana Dividend Stock Analysis