Enbridge (NYSE:ENB) is a diversified midstream giant with a $68 billion market cap and a 6.6% dividend yield. Meanwhile, Enterprise Products Partners (NYSE:EPD) is a $64 billion energy industry bellwether yielding 6%. Are these two interchangeable industry Goliaths, suggesting that you should just pick the one with the higher yield, or is there more going on that you need to think about? Here's what you should know before you pick between these two high-yield midstream names.
1. Size and scale
As their market caps suggest, both Enbridge and Enterprise are very large players in the North American midstream space. And they both have a diversified collection of assets. From that big-picture perspective, investors looking for exposure to the midstream sector might consider them roughly comparable. However, there are important differences.
For example, Enbridge generates around 15% of EBITDA from its natural gas utility division. Selling natural gas directly to consumers and businesses is a vastly different operation than owning pipelines for oil (50% of EBITDA) and natural gas (30%). Although its midstream operations generate most of its EBITDA (the remainder outside of its utility operations is in energy assets like wind farms), the company is not a pure play on the midstream sector. And, notably, the midstream operations are focused on pipelines.
That's very different from Enterprise, whose asset footprint spans across the pipeline, storage, processing facility, terminals, and transportation portions of the midstream sector. Investors looking for a diversified midstream company would probably be better off with Enterprise. Investors interested in a diversified energy company, however, could go either way. It's a subtle difference, but one worth understanding before jumping aboard either one.
2. Different balance sheet approaches
The next big differentiator here is found on the balance sheet. Enterprise has long been one of the more conservatively financed midstream companies, with debt to EBITDA toward the low end of its industry peers. Enterprise's debt-to-EBITDA ratio is around 3.2 times right now. Enbridge has historically made greater use of leverage, with its current debt-to-EBITDA ratio sitting at roughly five times. But that number has spiked much higher for brief periods of time, compared to a far more consistent pattern of fiscal prudence at Enterprise.
So far, Enbridge has proven capable of managing its higher debt load, including through some notable corporate changes (it recently bought back a number of controlled partnerships to simplify its business). And with a utility business included in the mix, it can probably handle a little bit more debt than a pure-play midstream company. However, for investors who prefer a safety-first investment approach, Enterprise easily wins the day here. Note, too, that Enterprise has recently moved to self-fund more of its own growth. That will help to make this conservative midstream player even safer because it won't need to tap the capital markets as much for debt or have to issue as many dilutive units.
3. Business structure
That brings us to the next notable difference: Enbridge is a corporation and Enterprise is a master limited partnership. One corporate form isn't inherently better than the other, but investors do need to make sure they understand this issue. Limited partnerships come with notable tax issues (both beneficial and negative) and you should probably consult a tax advisor if you own any. One big thing to think about, however, is that partnerships like Enterprise don't play well with tax-advantaged retirement accounts. So, if you are looking to invest money held in an IRA, Enbridge is the better bet.
4. Dividends and distributions
Enbridge yields a bit more than Enterprise, and that gives it an income edge. But it also has an edge when it comes to income growth. Over the past decade, Enbridge has grown its dividend at an annualized rate of roughly 12%. That's more than twice the growth rate seen from Enterprise's distribution, which increased about 5% a year over the same span. (Note that Enbridge pays dividends in Canadian dollars, so the actual amount U.S. investors will receive will depend on exchange rates at the time of the dividend.)
Enbridge uses more leverage and has historically rewarded investors well for the added risk. Enterprise is more like a slow-and-steady tortoise. It won't excite you, but it will likely provide you inflation beating distribution growth over time. And while both have more than two decades' worth of annual increases behind them, dividend growth investors will prefer Enbridge here.
5. Building for the future
And that brings up each company's plans for growth. Enterprise is currently working on roughly $6 billion worth of projects that will take it through 2020. That should lead to modest distribution growth, roughly in line with its low- to mid-single-digit history. After that, it will need to find more projects, but that shouldn't be a problem for the highly diversified partnership.
That said, Enbridge has plans to spend more than twice what Enterprise has in the works right now, which will take it through 2022 or so. And management believes that it can support, with internally generated funds, around $4 billion a year in projects across its portfolio on an ongoing basis. Although even the best-laid plans can fall short, Enbridge certainly looks like it has a better road map to back its long-term growth plans.
A tough call
To be honest, neither Enbridge nor Enterprise would be a bad addition to an income portfolio. The real question boils down to risk and how much of it you are willing to take on. Enbridge offers a higher yield and the likelihood of higher dividend growth over time, but it uses more debt to get there. You'll want to check up on this company regularly. If, on the other hand, you prefer a take-it-slow approach focused on safety, then Enterprise is the better option. You'll likely be able to sleep well at night even if you only check in on the somewhat boring partnership once a quarter or so.