Big yields, steady business models, and low-risk oil and gas exposure. Those are three great reasons to consider putting a midstream energy company into your portfolio, and Williams Partners L.P. (NYSE: WPZ) and Enterprise Products Partners L.P. (NYSE:EPD) are two of the biggest. Not only that, as master limited partnerships (MLPs), they are required to pay out most of their cash flow as distributions to investors.
If all that sounds tempting, let's look at which of these pipeline operators is the better buy for investors right now.
Let's lead off with the companies' distribution yields (as MLPs, their "dividends" are technically "distributions"), since that's what most investors are most interested in when considering a midstream energy company. Both are quite high, with Enterprise currently paying about 6.9% and Williams paying a mind-blowing 7.6%. But remember, current yield is only a part of the value equation. You should also look at the distribution growth and stability.
While Enterprise's quarterly distributions have risen steadily, quarter in and quarter out, for more than a decade, Williams' distributions have been lumpier. They jumped from less than $0.60 per share in late 2014 to $0.85 per share in 2015, only to be cut back down to $0.60 per share in Q1 2017. The company wasn't able to fully cover its distributions, so it pared them back. This was after its parent, Williams Companies (NYSE:WMB), slashed its own dividend in 2016, ostensibly to keep Williams Partners from having to trim its own distributions. Clearly, the strategy didn't go as planned.
After the cuts, though, both Williams Companies and Williams Partners have good coverage of their payouts. In its most recent quarter, Q3 2017, Williams Partners reported a year-to-date coverage ratio of 1.24 times. That's roughly the same as Enterprise's 1.2 times. As a result, some investors may want to just stick with Williams' higher yield. But stability should count for something, too, so Enterprise squeaks out a win in this category.
Of course, distribution yields are only one part of the value equation. Let's look closer at the companies' relative valuations to see which one looks like more of a bargain. Because MLPs tend to be high-depreciation businesses, though, we're going to have to look beyond the standard price-to-earnings ratio, which can get thrown off by depreciation.
Instead, let's look at the companies' enterprise multiples, which are calculated by dividing enterprise value by EBITDA. Since EBITDA doesn't include depreciation, it should give us a good sense of how the companies compare.
The companies' enterprise multiples are very similar on both a trailing and forward basis, but Williams Partners' is a couple of points lower on both counts, and lower is better here. On a trailing twelve-month basis, Williams sports a 13.5 enterprise multiple, while Enterprise's is 15.2. On a forward basis, Williams' is 12.3 while Enterprise's is 14.7. Both companies' multiples are in the middle of the pack when looking at the industry as a whole.
Therefore, Williams appears to be a marginally better value.
So far, we have a tiny win for Enterprise and a tiny win for Williams, a dead heat. Let's look at the companies' balance sheets to see if one can come out on top.
A healthy balance sheet is important for a midstream energy company, due to its heavy reliance on infrastructure. Low debt and a good credit rating give a midstream company the ability to grow through acquiring existing assets -- like pipelines, storage tanks, and terminals -- or building new ones.
Currently, both companies sport similar debt-to-equity ratios: Enterprise's is 0.44, while Williams' is 0.42 (lower is better). However, at the end of 2015, Williams' debt ratio stood at an eye-popping 1.38. Thanks in part to the cash freed up when the company cut its dividend, Williams has paid off $2.1 billion in debt so far in 2017.
Enterprise's debt has a Baa1 rating from Moody's, but it rates Williams Partners as Baa3. While this technically means -- according to Moody's -- that Enterprise is less risky than Williams, in actuality there isn't all that much difference between the two ratings. Baa3 is the 12th-highest rating that Moody's gives, while Baa1 is the 10th-highest out of 27 possible ratings, and both represent a "moderate credit risk." So, both are in the middle of the pack.
So, Enterprise's debt has a slightly higher rating, but Williams' debt-to-equity ratio is lower. It's a razor-thin margin, but I'm going to give it to Enterprise because for me, two debt rating levels trumps a difference of 0.02 in debt-to-equity ratio.
A tough call
Although Williams Partners has the slightly better debt-to-equity ratio, valuation, and current dividend yield, the stability of Enterprise Products Partners' dividend and its superior debt rating make it the better buy. That said, it's not too much better a buy, and investors will probably also be very satisfied with Williams Partners.
In a tight contest like this, though, things could change in only a few months. If you buy Enterprise now, you will still want to keep an eye on Williams and the other companies in the sector the next time you're looking to invest new money to make sure you're getting the best bang for your buck.