Enbridge Inc. (ENB 0.68%) yields a hefty 6.2% today. Enterprise Products Partners LP's (EPD 0.48%) yield is just a little bit higher at 6.3%. If you are looking at the energy sector, these two midstream industry giants have probably popped onto your radar screen. The fact is, both are pretty good options. But they are both working through transitions that you need to understand before you pick one. Here's a quick rundown of what you need to know before deciding which is the better buy for you.
Paring down the list of names
Enbridge is a Canadian energy company. Historically, it used the limited partnership structure as a funding source, selling assets (or "dropping down" in industry lingo) to controlled partnerships to raise cash for additional growth spending at the parent level. It was a pretty good game plan until the prices of limited partnerships fell on hard times, making it less advantageous to undertake such transactions. In 2018, Enbridge completed the process of buying its controlled partnerships so it could simplify its corporate structure.
Image source: Getty Images.
At the same time, Enbridge was working on streamlining its operations in another way, refocusing its business around regulated assets. To that end, it sold nearly $8 billion in non-core assets in 2018 as well. While it was working on these plans, it also took steps to reduce leverage and continue to invest in growth projects. Management was able to juggle all of these balls and produce solid financial results, highlighted by projected adjusted EBITDA growth of over 20% and a dividend hike of roughly 11%.
Looking forward, Enbridge is a much less complicated entity than it was just a year ago. And it still possesses material growth potential, looking for 10% distributable cash flow and dividend growth this year and next. Beyond 2020, it is projecting growth of between 5% to 7% on those metrics. Enbridge is a compelling investment story.
ENB Financial Debt to EBITDA (TTM) data by YCharts.
However, the one piece of the puzzle that still needs work is leverage. Reducing debt is management's second highest priority after investing in growth. It's a big issue to consider, particularly after all of the activity that took place in 2018 -- debt to EBITDA recently stood at a hefty 12.8 times. Enbridge has a lot going for it as an investment, but you still need to watch the company very closely if you step aboard here. For reference, Enterprise's debt to EBITDA ratio is only around 3.8 times.
Much less excitement
The debt to EBITDA comparison is interesting because it really highlights a key difference, here; Enterprise is very conservative, while Enbridge tends to be more aggressive. For example, Enterprise's big transition is working toward being able to self-fund more of its own growth so it doesn't have to tap capital markets as often with diluting unit sales to pay for its investment plans.
To get there, Enterprise has slowed its distribution growth from the mid to high single-digit range down to the low single-digits. This has allowed it to retain more cash from growth projects that are currently coming on line. Putting a number on that, the partnership's distribution coverage ratio has ballooned from a robust 1.2 times in 2017 to a huge 1.6 times through the first nine months of 2018. That extra cash is what management plans to use to fund growth instead of selling more units.
ENB Dividend Per Share (Quarterly) data by YCharts.
The transition to self-funding will continue in 2019, so don't look for huge distribution growth this year. However, Enterprise is, effectively, becoming a more conservative investment option than it was before, even while it continues to expand its investment portfolio. It has around $6 billion of growth projects planned for 2019 and 2020, which will continue to move it closer to its self-funding goals. And once the shift is complete, distribution growth should head back to the mid to high single-digit space again -- all layered on top of a partnership with relatively low levels of leverage. There's no reason to doubt that it can achieve this goal.
How much effort are you willing to put in?
This highlights the key difference between these companies. Enterprise is a very conservative income option that you don't really need to monitor on a regular basis. Enbridge, on the other hand, needs a little more attention because of the still-high leverage coupled with material growth plans -- a management misstep at Enbridge could derail your investment plans if you aren't paying close attention.
Yes, there's more dividend growth potential at Enbridge today, which may be just right for active investors willing to track their portfolios closely. However, for more conservative investors, Enterprise's slow and steady approach is probably the better option. In other words, Enbridge and Enterprise are both worthwhile investments, just for different types of investors.
Check out the latest Enbridge and Enterprise Products Partners earnings call transcripts.
