While Enbridge (NYSE: ENB) and Williams Partners (NYSE: WPZ) both operate energy infrastructure assets like pipelines, these companies are quite different otherwise. For starters, Williams Partners is a natural gas pipeline-focused master limited partnership (MLP) controlled by Williams Companies (NYSE: WMB) while Enbridge is a corporation that operates the world's longest oil pipeline system and it manages several MLPs. That difference in corporate structure is one reason Williams currently yields 6.2% while Enbridge's payout is 4.7%. That higher yield might tilt the scale for some income-focused investors.
That said, there are several other key differences between the two, ranging from their financial profiles to growth prospects to valuation, that make the choice between these two less obvious.
The metrics that matter
Often, income-focused investors get mesmerized by current yields and use them as the primary deciding factor in picking stocks. However, what's more important to consider is whether those payouts are sustainable, and the likelihood a company will be able to increase them in the coming years. To determine those answers, we need to drill down a bit deeper. Here's how these two businesses compare:
As the chart shows, Enbridge has a slightly better credit rating despite having a much higher leverage ratio. There are several reasons for this. First, Enbridge is in the midst of a major expansion phase that will see the company complete a whopping 13 billion Canadian dollars ($10.5 billion) of capital projects this year alone, and a total of CA$31 billion ($25 billion) worth by 2020. As those projects enter service, they'll supply the company with the incremental earnings to push leverage below its 5.0 times target by 2019. Another factor that plays a role in Enbridge's higher credit rating is its greater dividend coverage, which provides it with excess cash to help finance some of those expansion projects. Finally, while Williams Partners' leverage ratio is lower, when it's combined with the debt of Williams Companies, the consolidated ratio is 5.25 times.
The two also diverge widely on their projected dividend growth rates. Williams Partners anticipates increasing its payout by 5% to 7% annually over the next couple of years as its current slate of expansion projects enter service. Enbridge, on the other hand, expects to increase its payout at nearly twice that rate because it has a much larger and more visible series of projects coming down the pike. That positions the company to deliver a total annual return of 16% when adding its current yield with the midpoint of its dividend growth forecast while Williams Partners is on pace for about a 12% annual total return.
Typically, if a company is growing faster than its rivals, it would trade at a premium valuation, but that's not necessarily the case with Enbridge:
As the table shows, Enbridge's higher leverage ratio skews things a bit on the EV-to-EBITDA ratio since it has a larger proportional enterprise value. That said, when looking at things on a cash flow basis, it currently gets a much cheaper valuation. Because of that, investors have the potential to earn an even greater total return should Enbridge eventually revert closer to a mid-teens multiple, the neighborhood where Williams and other pipeline companies currently trade.
Less income now for a higher return later
Williams Partners offers investors a low-risk way to earn a high yield, with a payout that should increase by mid-single-digit percentages over the next few years. However, unless an investor needs that larger income stream in the near term, Enbridge is the better choice because it has the potential to produce much higher total returns over the long haul. That greater upside, at a cheaper valuation no less, makes it the better buy of the two in my opinion.
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