While Enbridge (NYSE:ENB) and Buckeye Partners (NYSE:BPL) both operate pipelines and storage terminals, these two companies couldn't be more different. Enbridge is a behemoth in the energy infrastructure space, controlling the biggest crude oil system on the planet as well as a whole host of other assets, including renewable power plants. Buckeye Partners, on the other hand, is a master limited partnership focused on operating refined product pipelines and storage facilities.

Another significant difference between the two is their respective income streams. Buckeye currently entices investors with a monster 8.9% current yield, while Enbridge offers an attractive 4.8% payout. While yield-starved investors might prefer Buckeye's higher payout, when it comes to the better buy between the two, Enbridge wins by a large margin.

Oil storage tanks at twilight.

Image source: Getty Images.

Drilling down into the numbers

Two of the factors that set Enbridge apart from Buckeye Partners is its stronger financial profile and significantly more robust growth potential. The following table shows how these two compare:

Company

Credit Rating

Debt-to-Adjusted EBITDA

Projected 2017 Distribution Coverage Ratio

% of Cash Flow Fee-Based or Regulated

Dividend Growth Forecast

Enbridge

BBB+/BBB/Baa2

6.2 times

2.0 times

96%

10% to 12% annual growth through 2024

Buckeye Partners

BBB-/Baa3

4.48 times

1.03 times

98%

5% growth in 2017

Data source: Enbridge and Buckeye Partners.

The first metric worth noting is the coverage ratios of the two companies. As that chart shows, Buckeye Partners has a razor-thin coverage ratio because it distributes nearly all its cash flow to investors. Enbridge, on the other hand, only pays out about half its cash flow, retaining the rest to help finance growth projects. That decision to hold back capital is the primary reason Enbridge's current yield is well below Buckeye's.

Meanwhile, Enbridge forecasts robust dividend growth for the next several years, which it backs with 31 billion Canadian dollars' ($25.3 billion) worth of high-return expansion projects under construction and another CA$48 billion ($39.1 billion) of projects in development. Buckeye, on the other hand, only expects to spend $295 million to $335 million per year on growth projects, which when combined with acquisitions, may continue to fuel low single-digit annual growth. Further, given its higher capital costs because of a lower credit rating and larger distribution yield, those projects won't move the needle as far as a similar project at Enbridge would.

One other thing that's worth noting is that Enbridge currently has a much higher leverage ratio. However, that's primarily because it has a significant slate of expansion projects currently under construction. Enbridge expects that as those projects enter service, they'll drive down its leverage ratio to 4.3 by 2019, which is well below its 5.0 target.

All that growth for a very reasonable price

Another factor investors need to consider is valuation. Typically, a company that's growing as fast as Enbridge would trade at a premium to its slower growing peers. However, when comparing the price to projected distributable cash flow ratios of these two companies, we see that there's a negligible difference:

Company 

Current Stock Price

Projected Distributable Cash Flow Per Share

Price to Distributable Cash Flow

Buckeye Partners

 $55.69

 $5.20

10.7 

Enbridge

 $39.96

 $3.75

10.9 

Data sources: Enbridge and Buckeye Partners. Stock price as of market close on Sept. 17, 2017.

Investors are thus paying about as much for the low-growth Buckeye as they are for the rapidly expanding, financially stronger Enbridge. This valuation disconnect suggests that investors have the potential to earn a much higher total return with Enbridge. To put it into perspective, Enbridge's current yield plus its dividend growth rate implies that it can produce a total annual return in the mid-teens while that same formula suggests a total annual return in the low-teens for Buckeye if it can keep up its current distribution growth rate.

A high-growth stock for a fair price

While investors who need a higher rate of income now might still opt for Buckeye Partners, Enbridge has the potential to deliver a much higher total return over the long-term given its faster growth rate. Add in the fact that investors can buy that growth for a relatively inexpensive price while pocketing a still attractive current yield that's on a stronger footing, and Enbridge is by far the better buy in my opinion.

 

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool has a disclosure policy.