Enbridge (ENB 1.71%) and NextEra Energy Partners (NEP -1.13%) have treated income-seeking investors very well over the years. Canadian pipeline giant Enbridge has increased its payout for 25 straight years, including by 10% for 2020. Meanwhile, the renewable energy-focused NextEra Energy Partners has grown its dividend at a fast pace since its formation in 2014, including by 15% last year.
Both companies expect to keep increasing their payouts in the future, making either one an enticing option for income-focused investors. However, since most investors probably only want to own one energy stock in their portfolio, we'll look at which of these two is the better buy for dividend seekers right now.
Comparing their financial profiles
The most important thing an investor can do when deciding between two dividend stocks is to analyze their financial situations. Here's how these two energy companies stack up against each other:
|
Company |
Dividend Yield |
Credit Rating |
% of Cash Flow Fee-Based or Regulated |
Dividend Payout Ratio |
|---|---|---|---|---|
|
Enbridge |
6.1% |
BBB+/Baa2 |
98% |
70% |
|
NextEra Energy Partners |
3.6% |
BB/BB+/Ba1 |
About 100% |
Mid-70% |
Data sources: Enbridge and NextEra Energy Partners.
As that table shows, both companies generate very stable cash flow since fee-based contracts or regulated rates underpin virtually all their assets. Furthermore, both have conservative dividend payout ratios for the energy infrastructure sector.
Where they differ is in the strength of their balance sheets. Enbridge has an investment-grade credit rating, while NextEra Energy Partners has a sub-investment-grade rating. That's a noteworthy difference, since companies with investment-grade ratings can borrow money at lower rates and better terms.
Because of its lower credit rating, NextEra Energy Partners has had to be creative to finance its growth. Last year, for example, it worked with asset manager Blackrock (BLK -0.86%) on a convertible equity financing transaction so that it could acquire Meade Pipeline Company. It completed a similar deal with Blackrock in 2018 to help finance the acquisition of a portfolio of renewable-energy assets from its parent NextEra Energy (NEE 0.34%). The company also worked with private-equity giant KKR (KKR -1.35%) on a convertible financing transaction to acquire another portfolio of renewable energy assets from NextEra Energy in 2019. The concern with NextEra Energy Partners is that its lower credit rating makes it more challenging for the company to line up financing to expand.
Image source: Getty Images.
A look at their growth outlooks
Enbridge currently has $11 billion Canadian worth (that's US$8.6 billion) of expansion projects under construction. These include several new oil and gas pipelines, as well as offshore wind farms in Europe. In the company's view, it can grow its cash flow per share by about 2% this year and at a 5% to 7% annual pace in the future. Further supporting that longer-term outlook is a large slate of expansions it has in development, including more oil and gas pipelines and additional offshore wind farms in Europe. Enbridge estimates that it has the internal capacity to self-finance CA$5 billion-CA$6 billion ($3.8 billion-$4.5 billion) of expansion projects per year with retained cash after paying its dividend and new debt while maintaining its targeted investment-grade credit metrics. The company could support dividend growth in the 5% to 7% annual range after this year as a result.
NextEra Energy Partners, meanwhile, expects to grow its dividend by 12% to 15% per year through 2024. It already has enough power to deliver dividend growth within that range in 2020 thanks to last year's acquisitions. However, it will need to complete additional transactions starting next year to support its strategy.
On a positive note, it has no shortage of acquisition opportunities, since its parent, NextEra Energy, owns a vast portfolio of renewable-energy assets as well as some gas pipelines that it could drop down to its affiliate. The only question is whether NextEra Energy Partners will be able to secure the financing it needs to complete those deals.
Image source: Getty Images.
A quick peek at their valuations
Enbridge currently expects to generate between CA$4.50 to CA$4.80 per share ($3.38-$3.60) in cash flow this year. With the Canadian energy infrastructure giant's stock selling for around $39.50 apiece, it implies that it trades at about 11 times cash flow. That's a bit below the historical norm for a pipeline company, which typically trades at a mid-teens multiple of cash flow.
NextEra Energy Partners, meanwhile, expects to generate about $3.25 per share in cash flow this year. With the stock currently trading at around $59 per share, it sells for about 18 times cash flow. That's not an unreasonable valuation, given how fast the company expects to grow and its focus on renewable energy.
Verdict: Enbridge is the better buy for lower-risk dividend investors
NextEra Energy Partners promises investors high-powered dividend growth over the next several years. However, because acquisitions will be the main source fueling growth, there's an increased risk that it might fall short, especially given its lower credit rating.
Enbridge, meanwhile, expects to grow its earnings and dividend at a more moderate rate over the next few years. It's a much more achievable plan since organic expansions -- that it can fully fund internally -- drive its strategy. Add that lower-risk growth profile to its cheaper valuation and higher yield, and Enbridge is the better buy for dividend-focused investors these days.
