Both Enbridge (ENB 1.19%) and Enterprise Products Partners (EPD 1.05%) are top energy-sector stocks with solid performance and dividend growth histories. Both companies have impressively weathered the ups and downs in the energy sector over the last several years. What's more, with healthy project pipelines, each looks set to continue growing in the years to come. Despite these similarities, one of the two looks like a better buy than the other right now. Let's see why.
Operations and structure
Enterprise Products Partners is a diversified midstream company that transports, stores, and processes crude oil, natural gas, and natural gas liquids (NGLs). It is structured as an MLP -- which some investors don't like due to the extra work needed at the time of filing tax returns.
Canadian pipeline company Enbridge has its operations spread across Canada and the U.S. Primarily involved in the transport of oil and gas, Enbridge also has gas utility and power transmission businesses.
More than 85% of Enterprise Products' earnings are fee based, making earnings relatively stable even when commodity prices are volatile. Likewise, Enbridge's gas transmission and distribution operations are regulated, providing it with a somewhat steady income stream. Enbridge's liquids operations are largely administered under a competitive toll settlement framework, which is approved by the National Energy Board. All in all, like Enterprise Products, Enbridge's cash flows are also cushioned, to a large extent, from short-term commodity price fluctuations.
Enbridge grew both earnings and dividends faster
The first notable difference between the two companies is their respective growth rates. Enbridge beats Enterprise Products Partners on this front.
As the above graph shows, over the last 10 years, Enbridge grew its earnings at a higher average rate compared to Enterprise Products Partners. That supported its higher dividend growth over the same time frame. Over the years, Enbridge raised more funds, both debt and equity, to finance this growth.
Enterprise Products' balance sheet is stronger
Enbridge raised 1.5 billion Canadian dollars through private placement of its common shares in 2017. The company's debt also increased in that year as a result of the Spectra Energy acquisition. In 2018, the company again issued common shares to complete acquisition of Enbridge Energy Partners and Enbridge Energy Management.
As the above graph shows, Enbridge's financial debt-to-EBITDA ratio is higher than that of Enterprise Products Partners. This surely goes in Enterprise Products' favor. However, a couple of things are noteworthy here. First, Enbridge's ratio has historically been higher than Enterprise Products' and hasn't really shot up as a result of the increased debt. The ratio stands close to its 10-year average thanks to Enbridge's EBITDA growth.
Second, Enbridge's expected debt-to-EBITDA ratio, on an adjusted basis, at the end of 2020 is 4.7 -- within the company's target range of 4.5 to 5. So the company is comfortable operating at the current leverage levels and intends to operate in that range. That's a slightly more aggressive approach than Enterprise Products' but doesn't look so aggressive as to be a cause for concern. Rising earnings that are not affected by commodity price fluctuations backs Enbridge's slightly higher use of debt.
And the better buy is...
Enterprise Products Partners has historically traded at a higher dividend yield than Enbridge.
Despite that, the MLP underperformed Enbridge on a total return basis over most time frames. Enbridge's higher growth, combined with fallen investor interest in MLPs, is likely behind this difference.
With a project pipeline of CA$10 billion (US$7.8 billion) that Enbridge expects to complete through 2023, the company looks well placed to continue growing its earnings. Enterprise Products expects to spend $2.4 billion on sanctioned growth projects through 2022.
Both Enbridge and Enterprise Products Partners have low-risk operations, reasonable leverage, and healthy project pipelines. But higher earnings and dividend growth and a more popular corporate structure will likely support Enbridge stock's outperformance in the future. That makes it a better buy than Enterprise Products Partners right now.