Enbridge (NYSE:ENB) and Enterprise Products Partners (NYSE:EPD) own massive collections of midstream energy assets. They both have generous yields, a hallmark of the sector in which they operate. In a head-to-head comparison, however, one stands just a little bit ahead, and that will likely make it the standout choice for most investors. Here are some things to consider when comparing this pair.
1. Simplicity matters
Enterprise Products Partners is a master limited partnership (MLP). This is a very specific business structure that functions as a pass-through entity, treating unitholders as part owners of the business. That allows investors to benefit directly from things like depreciation, but it creates complications at tax time as unitholders have to deal with the K-1 tax form. And MLPs don't fit easily within tax-advantaged retirement accounts because of the nature of the income that they create. It's advisable to consult a tax accountant if you own MLPs.
Canada-based Enbridge is structured as a regular corporation. Its dividends are paid in Canadian dollars, which means that the amount U.S. investors receive will fluctuate with exchange rates. But other than that, there are really no complications with owning it. It can even live within a tax-advantaged retirement account. If you are looking to keep your investment life simple, Enbridge is the easier option here.
2. Size isn't an issue
Enterprise has a $50 billion market cap while Enbridge weighs in at roughly $80 million. Obviously Enbridge is the larger entity, but both companies are really giants in the midstream space. They own massive collections of energy assets and are vital to the smooth working of the industry. There are nuances (more on this below), but if you want to own a big and diversified midstream player they both qualify.
3. Similar, but different
That said, Enterprise has a slight tilt toward natural gas, which makes up around 62% of its business, with the rest tied to oil. Enbridge's business is roughly 54% oil, with 29% related to natural gas pipelines, 14% to natural gas distribution, and 3% to power. Obviously this is a high-level view of things, but there's one notable takeaway here: Enterprise is more focused on midstream assets, like pipelines, storage, processing, and transportation facilities. Enbridge's portfolio creeps into some different areas, with its natural gas distribution business basically falling into the regulated utility space. Power, meanwhile, is heavily focused on renewables. In many ways it is the more diversified entity.
That said, Enbridge's main asset is the Mainline system. It's an oil pipeline runs from Canada down to the Gulf Coast, and has a number of important offshoots. Problems with this asset would be a very big deal. Enterprise doesn't have that same level of focus in its portfolio. Although that's a wrinkle that investors will need to keep in mind, Enbridge will likely stand out on the diversification front because of the overall mix of assets it owns.
4. Preparing for the future
Both Enterprise and Enbridge are positioning themselves to support the shift from dirtier carbon fuels to cleaner options, including renewable power. The big issue here is natural gas, which is increasingly displacing coal in the power grid. However, Enbridge is taking a more aggressive approach to the clean energy shift and investing directly in renewable power. While it only makes up 3% of the business today, the company has a number of large offshore wind farm investments in Europe that will grow this segment over time. It isn't new to the space, either, having started investing in renewable power in 2002.
Enterprise is sticking closer to home, increasingly focusing its spending on processing assets (around 73% of its current capital spending plans) that will likely remain in demand even as the world goes green. For investors looking to hedge their bets on the renewable power front, however, Enbridge has the easy edge.
5. Dividends and distributions
Enbridge's yield is roughly 6.8% today, and it has increased its dividend annually for 26 consecutive years. It targets a distributable cash flow payout ratio of between 60% and 70%, and is generally within that range. Looking forward, the company is targeting distributable cash flow growth of between 5% and 7% a year, with the dividend expected to trail along in a similar, though perhaps slightly lower, range.
Enterprise's distribution yield is roughly 7.7%. The partnership has increased its distribution annually for 24 years. Although it doesn't target a specific range for its distributable cash flow payout ratio, the number was within the same range as Enbridge in the first quarter. That said, distribution growth over the last few years has been in the low-single-digits. Although Enterprise has a higher starting yield, it hasn't kept pace with Enbridge on the dividend growth front, and that gives the Canadian giant a material edge unless current income is the sole dividend issue being considered.
So far, Enbridge has come out basically on par or ahead of Enterprise on every point. But there is one factor where it has a history of falling behind: balance sheet strength. Enterprise is a very conservatively managed entity, with its financial-debt-to-EBITDA ratio generally sitting toward the low end of the midstream sector. Today that number is roughly 4.1 times. Enbridge's financial-debt-to-EBITDA ratio is currently around 4.5 times, which seems like a wash. However, Enbridge has a history of being more aggressive with its balance sheet. In fact, financial-debt-to-EBITDA was well over 12 times not too long ago, and has historically been toward the higher side of the industry. Perhaps this isn't an issue right now, which suggests another point in Enbridge's favor, but it is something that more conservative types will want to keep a close eye on.
The final call
Overall, Income-focused Investors really wouldn't be making a mistake with either name in this match up. They have a great number of similarities, and some of the differences really amount to personal preference (MLP vs regular corporation, for example). However, there are enough places where Enbridge comes out ahead of Enterprise that it has a notable edge, especially for those seeking dividend growth. Enbridge is likely to be the better choice for most.