Even though oil and gas master limited partnership Enterprise Products Partners (EPD +1.68%) and renewable-power partnership Brookfield Renewable Partners (BEP 1.83%) operate in completely different parts of the energy business, both companies have a lot of common traits investors want. On top of the fact that both are high-yielding stocks that have paid steadily growing dividends for a decade or more, their management teams have relatively similar approaches.
Investors looking to choose between these two stocks are faced with a tough choice, because a solid case could be made to invest in both. For argument's sake, though, let's stack these two companies up against each other to see which one is the better investment today.
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Good stewards of shareholder capital
When it comes to investing in high-yield stocks, you have to have a lot of faith in management to be good stewards of shareholder capital. Being able to pay out such large chunks of cash on a regular basis means a company has to be scrutinous in selecting high-rate-of-return projects to grow the business as well as maintaining a low cost of capital.
For more than a decade, management at both Brookfield Renewable and Enterprise Products has proven to be very adept at this. Both companies have been able to steadily grow their payouts while at the same time maintaining investment-grade credit ratings and not having to dilute shareholders too much with equity issuances. On the occasions that the respective companies have used equity, it has been to acquire assets at relatively attractive prices.
EPD Dividend data by YCharts.
It's also encouraging that both management teams leave themselves a lot of margin for error when it comes to their payouts to shareholders. Instead of paying out nearly all available cash at the end of each quarter like so many partnerships do, both Brookfield and Enterprise elect to retain a high rate of cash that can be used to invest in new growth. In the most recent quarter, Enterprise Products Partners' distribution coverage ratio (cash available for distribution over cash distributed) was 1.5 times, and Brookfield's payout was less than 90% of funds from operations (a similar metric to distributable cash flow but a different name because of the different industry).
For investors looking for some sense of sustainability in a dividend, both of these companies offer a good cash cushion. At the moment, Enterprise's margin of safety is much larger, but that is largely a product of the market opportunities today.
Investment opportunities abound
Another place these companies share a relatively common trait is the fact that both have immense opportunities to grow their businesses right now. In the U.S., shale drilling is absolutely booming thanks to higher oil prices and lower breakeven prices that have come from better drilling technology and best practices. The rate at which production is growing in places like the Permian Basin is outpacing how quickly companies like Enterprise can put pipelines in the ground. On top of pipelines, Enterprise is finding other unique opportunities, including building chemical manufacturing plants, natural gas liquids export terminals, and one of the nation's first offshore crude oil export terminals to fill very large crude carriers (VLCCs).
Enterprise's current quiver of projects is so large that management has elected to slow down its payout growth in order to deploy more cash to these investments. Its current spending levels are much higher than they have been in prior years, and the company has already raised its capital spending guidance this year twice, to $3.8 billion to $4.0 billion in 2018. It wouldn't be surprising if that number increases even more by the end of the year.
Image source: Getty Images.
Similarly, Brookfield Renewable Energy sees explosive growth in the renewable-energy industry that is just waiting to be exploited. According to management, about $325 billion is invested in clean energy globally each year. When markets are growing that fast, there are bound to be some projects that become distressed or mispriced for one reason or another. Situations like this, in which it can swoop in and provide financial and operational support for mispriced assets, are Brookfield's specialty. A recent example of this was when it bought a stake in TerraForm Power (TERP +0.00%) (and bought a larger stake recently). Brookfield took control of a quality asset that was in financial trouble because of its parent and was able to acquire it out of bankruptcy proceedings for a steep discount.
One area that Brookfield is targeting today is the commercial and distributed solar market in North America. It is a fast-growing market in which the top five players own less than 25% of the market. Management anticipates similar situations with mispriced or distressed assets and expects to spend $500 million in this area alone over the next five years.
Clearly, these two companies have immense growth potential ahead of them, and their management teams are gearing up the businesses by keeping payouts at measured rates.
Going global vs. weaving new threads into an existing web
One thing that separates these two companies significantly is the fact that Enterprise Products Partners doesn't have assets outside North America, whereas Brookfield Renewable Partners has a considerable presence in South America and Europe and is getting ready to launch investments in India and China. Investing globally gives Brookfield a much larger sandbox in which to play and provides more opportunities to seek out distressed assets in places where other investors might not go.
Enterprise's decision to invest in North America alone isn't necessarily a bad thing, though. One of the reasons management is able to find and develop high-rate-of-return projects is because it can leverage its existing assets. I don't doubt that it could find some investments to make overseas, but finding projects that complement its current asset footprint improves returns across the entire system. Someday, Enterprise might need to look beyond North America's borders for growth opportunities, but that is a long way off.
EPD Total Return Price data by YCharts.
Close call
In all honesty, I think that both Enterprise Products Partners and Brookfield Renewable Partners would be worthy investments in anyone's long-term investment portfolio. Both companies have great management teams that have steadily grown shareholder capital, both have huge market opportunities to capture over the next few years, and both provide high-yield dividends that can be very helpful in supplementing one's income or being a wealth-building engine through reinvested dividends.
If I had to pick one of these stocks today, I think I would lean ever so slightly toward Brookfield Renewable Partners. The company simply has a larger sandbox to play in looking out beyond the next decade. Also, shares have hit a rough patch lately, and you can get them at a yield higher than their historical average. Enterprise is still a great stock to own, but shares trade at a bit of a premium compared to its peers and rarely go on sale. Either way, you are getting a great stock to hold for a long time.
