Enbridge and Williams Companies are two of the largest pipeline companies in North America. Because of that, they generate lots of cash flow as oil and natural gas flow through their systems. Both use those funds to pay high-yielding dividends to their investors, as well as to expand their pipeline networks.

Most dividend investors, however, probably want to have only one of these pipeline stocks in their portfolio. Here's a look at which one is the better buy right now.

A calculator with stacks of coins next to it.

Image source: Getty Images.

Drilling down into their financial profiles

The first thing investors need to do when considering two similar income investment opportunities is to compare their financial profiles. Here's a look at how these two pipeline giants stack up against each other:

Company

Dividend Yield

Credit Rating

% of Cash Flow Fee-Based or Regulated

Dividend Payout Ratio

Debt-to-Adjusted EBITDA

Enbridge (NYSE:ENB)

6%

BBB+/Baa2

98%

66%

4.7 times

Williams Companies (NYSE:WMB)

6.6%

BBB/Baa3

97%

59%

4.5 times

Data source: Company investor presentations.

As that table shows, these companies have very similar financial profiles. Both generate very predictable cash flow since stable sources like fee-based contracts supply nearly all their earnings. Meanwhile, they both have solid investment-grade balance sheets backed by healthy leverage ratios for the pipeline industry. Enbridge's leverage is well within its 4.5 to 5.0 times target range, while Williams is targeting a 4.2 times leverage ratio over the long term. Enbridge, though, does see its leverage ratio falling below its target range by 2021 as its current slate of expansion projects come online.

The only other notable difference between the two is that Williams Companies currently has a higher dividend yield even though it has a slightly lower payout ratio.

A look at their growth prospects

Another important factor to consider when comparing two investments is growth potential. Enbridge is currently in the middle of a three-year expansion program that should enable the Canadian pipeline giant to grow its earnings and dividend at a 10% annual rate through the end of next year. Supporting that outlook are the 9 billion Canadian dollars ($6.8 billion) of expansion projects that should enter service by the end of this year. Enbridge then sees its growth moderating after next year. It estimates that it can grow its cash flow by 5% to 7% per year as it completes CA$5 billion to CA$6 billion ($3.8 billion to $4.5 billion) of expansions each year. That should support a similar growth rate in its dividend.

Williams Companies, meanwhile, is currently on track to grow its earnings by about 8% this year. It, too, is targeting 5% to 7% annual growth in the future. However, due to weaker natural gas prices this year, it currently anticipates that its growth rate will slow considerably in 2020, though it still expects to deliver dividend growth within that 5%-to-7% target range next year.

A quick look at their valuations

A final area that investors should compare when analyzing two similar companies is their valuations. For pipeline stocks, the best metric to use is their price to cash flow.

In Enbridge's case, it's currently on track to generate about $3.34 per share of cash flow in 2019. With the stock currently trading at $37.50 per share, it sells for around 11 times cash flow.

Williams Companies, meanwhile, is on track to produce about $2.55 per share in cash flow this year. Its stock currently trades at $23 per share, meaning that it sells for roughly nine times cash flow. That cheaper valuation helps explain why it has a high dividend yield even though it has a lower payout ratio.

Verdict: Williams Companies is the better buy

Both pipeline companies are solid options for income-seeking investors. However, after crunching the numbers, Williams Companies comes out ahead. That's because it has a higher yield and lower valuation even though it offers similar long-term growth prospects. That cheaper price sets it up to potentially generate higher total returns compared to Enbridge in the coming years, making it the better buy right now.