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Better Buy: Enbridge Inc. vs. Enterprise Products Partners L.P.

By Reuben Gregg Brewer – Aug 23, 2018 at 7:05AM

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These high yielders have similar businesses and are making notable changes to their operations, but their dividend outlooks are different today.

If you are on the lookout for highly respected midstream oil and natural gas companies offering robust yields, then Enbridge Inc. (ENB -0.58%) and Enterprise Products Partners L.P. (EPD -0.37%) have probably popped onto your radar. Either one would be a good long-term investment, but if you have to pick just one, you'll want to err on the side of dividend growth. Here's what you need to know to pick between Enbridge and Enterprise Products Partners.

1. Slowing down to get better

Enterprise Products Partners is one of the largest midstream industry players in North America. Its diverse portfolio of assets includes pipelines, processing facilities, storage, ports, and a fleet of ships. With a $62 billion market cap, it has few peers that can match its scale and reach. It's also a very conservatively run partnership, with a streak of 21 consecutive annual distribution hikes giving the best evidence of management's preference for slow and steady growth. The current distribution yield is a hefty 5.9%.

A man talking on a communications device in front of midstream infrastructure

Image source: Getty Images.

As a partnership, Enterprise grows by expanding its portfolio of fee-based assets via capital investment and acquisition. Historically, Enterprise has tapped the capital markets to fund much of this growth via unit sales and debt issuances. However, it is shifting gears so that it can self-fund more of its growth. That will put a damper on distribution growth for at least a year or two, with projections calling for hikes that will roughly equate with the historical growth rate of inflation.

Even during the best of times, though, Enterprise's distribution only grew in the mid-single-digit range. It should get back into that range once it's through the current transition. However, that just makes it a slow and steady tortoise. Not a bad thing for conservative investors, but for those seeking more material dividend growth prospects, there are better options -- particularly today while Enterprise is pulling back on distribution growth.

2. Refocusing on the core

That's where Canada's Enbridge comes in. With a $62 billion market cap, it is one of the few midstream companies that can compete with Enterprise on an equal footing. Its assets span the midstream and regulated utility space. Enbridge is structured as a corporation, though it does act as the general partner for (and own a material percentage of) a collection of partnerships and sister corporations. It has increased its dividend for 22 consecutive years, one year more than Enterprise (note that the dividend amount U.S. investors receive will fluctuate with exchange rates). Although its current yield is a little lower at 5.6%, Enbridge's dividend has historically grown in the low double digits, with the most recent year seeing a huge 17% dividend hike. That's the core reason to favor Enbridge over Enterprise.

That said, Enbridge is making a big transition of its own today. It recently bought Spectra Energy, materially expanding its scale and reach. It is working to integrate Spectra's midstream business and, at the same time, shifting its portfolio so it is focused more on regulated assets. There are a lot of moving parts right now. For example, it has 7.5 billion Canadian dollars of noncore business sales already inked, including the sale of a renewable power operations. It is also working to simplify its business by acquiring the four entities that now exist as separate controlled companies or partnerships. And while it's doing all of this, management is also working on a CA$22 billion capital project pipeline between 2018 and 2020.

EPD Dividend Per Share (Quarterly) Chart

EPD Dividend Per Share (Quarterly) data by YCharts.

That's a lot of moving parts, but Enbridge has a history of success behind it that is pretty impressive. It expects its distributable cash flow, which fell in 2017 during the start of this transition period, to pick up again between 2018 and 2020 as its capital spending plans start bearing fruit. The company is looking for dividend growth of around 10% a year over that span, roughly in line with its historical rates and well more than what you'll get from Enterprise. For investors willing to keep track of a more complex business, that pickup in dividend growth is probably worth the extra uncertainty.

Go for the growth

At the end of the day, Enterprise and Enbridge are both well-run entities and worth considering. For conservative investors who don't want to spend much energy tracking their investments, Enterprise is a great choice with a hefty yield and a long history of success behind it. That said, if you are willing to take the time to monitor Enbridge's progress as it focuses its business on regulated assets, the robust dividend growth it offers will likely prove well worth the extra effort. It is the better option of these two midstream giants right now, in my opinion.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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