Enterprise Products Partners L.P. (EPD +0.08%) and Williams Partners L.P. (NYSE: WPZ) are both benefiting from increasing demand for midstream assets like natural gas pipelines. And investors can expect a nice income stream from each, with both offering unitholders distribution yields of around 6.3%. But there's a big difference between the two partnerships that income investors shouldn't ignore.
A bright future
At Williams Partners' recent analyst day, management spoke at length about the future. For example, at this point in time, the partnership's business is largely fee-based. That means demand for the company's midstream assets is more important than the price of what's being pushed through them.
Image source: Getty Images.
And then there's the increasing demand for natural gas, which is a key focus for Williams. Between 2010 and 2016, the compound annual growth rate of gas demand was 3.2% a year. However, from 2016 to 2021, it's projected to be 3.8%. LNG exports, industrial demand, and utilities switching to natural gas are expected to be key drivers, with Williams' assets positioned to benefit.
Williams is also expanding its footprint, with billions of dollars' worth of projects lined up to increase throughput. For example, the partnership has $7 billion worth of projects being worked on along the East Coast and Gulf Coast so it can better serve the Northeast's increasing appetite for natural gas.
The big spend on the East Coast. Image source: Williams Partners L.P.
There's only one problem: Williams pretty much hit the reset button over the last year. In 2016 it sold assets to refocus its business and, in early 2017, it cut its distribution by 30%. There really is a lot to like about the future, and the distribution cut was likely the right thing to do for the partnership to help ensure it can achieve its goals. However, if income consistency is important to you, Williams isn't the right name for your portfolio until it proves it's on the right path to distribution sustainability.
Steady as she goes
Which is why most investors would be better served by Enterprise Products Partners. This partnership is among the largest midstream players in the United States. It has assets ranging from pipelines to storage to processing to ships. Like Williams, its focus is on fee-based businesses.
And growth is important at Enterprise, too. At this point, it has around $8.4 billion worth of expansion projects in the works through 2019. Williams is a smaller partnership, with a market cap of around $37 billion compared to Enterprise's $57 billion. That means growth will be easier to achieve at Williams. But slow and steady isn't a bad thing if you're looking for consistent income.
Enterprise is building, too. Image source: Enterprise Products Partners L.P.
Enterprise is, by the way, amazingly consistent. Despite oil falling from over $100 a barrel in mid-2014 to a nadir of $30 a barrel, Enterprise kept chugging along. For example, Its gross margin didn't drop like a rock; it trended sideways at a little over $5 billion. Plus, the distribution kept growing. In fact, there was never any question about the partnership's ability to support its distribution, which obviously can't be said of Williams.
Enterprise has an incredible distribution record. For example, its streak of paying annual dividends is up to 20 years. That puts this 6.2% yielder in rare company, among names like IBM (22 years) and United Technologies (23 years). In just five more years it will qualify for the Dividend Aristocrats list. In contrast, Williams has to demonstrate its distribution commitment from the ground up.
Twenty years, however, isn't the only streak Enterprise has going. It has also increased its distribution for 51 consecutive quarters. So not only are unitholders getting pay raises each year -- they're getting them each quarter! The rate of distribution growth is around 5%, handily beating the historical rate of inflation (around 3%) and providing a cornerstone investment for a diversified income portfolio. I'll take that over Williams' business and distribution reset any day.
Investor takeaway
If you are willing to look past Williams' reset, there are solid reasons to like the partnership. But if you want a steady stream of income, it hasn't provided that and you can't just assume it will in the future. Enterprise, on the other hand, has rewarded unitholders with increasing distributions for 20 years. With nothing to suggest that trend is going to change, income-focused investors should drop Williams and pick up Enterprise.
