Enbridge (NYSE:ENB) and Plains All American (NYSE:PAA) are behemoths in the oil pipeline industry. Canada's Enbridge operates more than 17,000 miles of oil pipelines that transport roughly 3 million barrels of oil each day (BPD). Meanwhile, Plains All American operates about 18,000 miles of pipeline that move around 6 million BPD. Those pipelines generate lots of cash, which both companies use to pay attractive dividends (Enbridge yields 7.4% while Plains All American yields 8.6%).  

While both payouts will catch the attention of income investors, they likely only want to own one oil pipeline company. Here's which one stands out as the better buy right now.

A twist of pipelines with a bright sun shining through.

Image source: Getty Images.

Analyzing their financial profiles

A high-yielding dividend is only as secure as the company's financial foundation. With that in mind, here's how these two pipeline giants currently stack up:

Company

Credit Rating

% of Cash Flow Fee-Based or Regulated

Dividend Payout Ratio

Debt-to-Adjusted EBITDA

Enbridge

BBB+/Baa2

98%

65%

4.5 

Plains All American Pipeline

BBB-/Ba1

91%

33%

3.0 

Data sources: Enbridge and Plains All American.

Both pipeline companies have solid financials. Enbridge gets a larger percentage of its cash flow from stable fee-based and regulated assets and has a higher credit rating. Meanwhile, Plains All American has lower dividend payout and leverage ratios.

Plains All American has a lower dividend payout ratio because it reduced its payout by 50% earlier this year because of all the uncertainty in the oil market. That's its third decrease over the past few years, mixed in with an increase last year that it quickly reversed. The main driver of these reductions is the company's weaker credit profile, -- including a junk rating by one credit rating agency -- making it more expensive for Plains All American to borrow money. Because of that, the company's near-term focus is on reducing leverage to achieve a credit rating similar to Enbridge's.

A look at how much fuel's left in the tank

Plains All American is putting the finishing touches on a multi-year organic expansion program to support growing oil production in North America. It currently expects to spend $1.1 billion on expansion projects this year and another $450 million next year. Once it gets over that spending hump, the company will likely be able to boost its dividend since those projects will generate cash flow. With limited growth spending likely beyond 2021 because of the current overabundance of oil, Plains All American could significantly boost its dividend once it achieves its targeted credit rating.

Enbridge has about 10 billion Canadian dollars ($7.5 billion) of capital projects on the docket for this year and another CA$5.5 billion of secured capital spending to fund through 2022. Those projects include new oil and gas pipelines, expansions at its gas utilities, and offshore wind farms in Europe. Enbridge estimates that it can finance between CA$5 billion-CA$6 billion ($3.7 billion-$4.5 billion) of expansion projects per year with retained cash and incremental borrowings while maintaining its credit rating. That investment level should support 5% to 7% annual cash flow growth. Given its more diversified portfolio, it has no shortage of opportunities, including LNG-related gas pipelines, utility franchise expansions, and more renewable energy projects. That should give Enbridge the fuel to keep increasing its dividend, which it has done in each of the last 25 years.

Comparing their valuations

A final factor that income investors should consider is valuation. Both of these pipelines stocks trade at much lower prices than at the start of the year because of all the turbulence in the oil market. Enbridge's stock has tumbled about 22%, while Plains All American has plummeted by roughly 55%. Those slumps come even though both companies expect to generate lots of cash this year. Because of that, both trade at dirt cheap valuations:

Company

Recent Price

2020 Cash Flow per Share (Estimate)

Price-to-Cash Flow Ratio

Enbridge

$31

$3.47

8.9 

Plains All American Pipeline

$8

$2.16

3.8 

Data sources: Enbridge and Plains All American. Calculations by author. All figures adjusted for U.S. dollars.

While both are cheap, Plains All American sells for about half the cash flow multiple of Enbridge. On the one hand, Enbridge should trade at a higher multiple, given its stronger financial profile and greater diversification. However, Plains All American sells for a ridiculously low valuation these days. 

Deep value could fuel big-time upside

Enbridge and Plains All American offer dividend investors high yields backed by steady cash flow and solid balance sheets. Where they differ is that Plains All American trades at a bottom-of-the-barrel valuation because of the outsize impact this year's oil market downturn has had on its operations, giving it a lot more near-term upside as the market continues to recover. Add that to its higher dividend yield, -- which it could boost significantly in the coming years once it gets over its spending hump and achieves its targeted leverage metrics -- and it has the potential to generate much higher total returns than Enbridge. That makes it a more compelling buy right now.