Enterprise Products Partners (NYSE: EPD) and Magellan Midstream Partners (NYSE: MMP) are arguably the two best-managed master limited partnerships in the industry. Instead of distributing all their cash flow to investors and taking on excessive debt to fund growth like many rivals, these companies have taken a more conservative approach to both investor returns and expansion. That has enabled both to maintain healthy financial profiles so that they can continue to increase their payouts to investors even as many rivals have had to slash theirs and redirect that cash flow to improving their financial situation.
Because of their financial strength, investors face a tough choice when deciding between the two. That said, when factoring in their current yield, valuation, and growth prospects, Enterprise once again stands out as the better buy.
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A quick look under the hood
As I previously mentioned, Enterprise and Magellan have two of the strongest financial profiles among MLPs. Here's how these two companies stack up against each other as well as versus rival MLPs:
As that table shows, Magellan has some of the best financial metrics in its peer group right now. Meanwhile, Enterprise ranks third in this group behind Magellan and MPLX. In the eyes of credit rating agencies, though, both share the top rating among MLPs (Baa1/BBB+). One reason for the similarly high rating is that Enterprise has less cash flow volatility since fees underpin 93% of its gross operating margin (GOM), while only supporting 88% of Magellan's GOM. Those robust financial profiles are a big reason why these MLPs have been able to continue to increase their payouts during the energy market downturn while both Williams and Plains have had to cut their payouts.
The three-factor checklist
While Magellan might have a razor-thin edge over Enterprise's overall financial profile at the moment, that's not the only factor investors need to consider when choosing between the two. Three others that many investors use to make an investment decision are a company's current yield, relative valuation, and growth prospects. Here's how these two compare:
As that chart notes, Enterprise Products Partners holds more appeal to both income and value investors since it offers a higher current yield and less expensive relative valuation. While that lower price would make sense if Enterprise had noticeably weaker financial metrics or unappealing growth prospects, that isn't the case. Currently, the company has $9 billion of growth projects underway, which represents 11% growth when measured against its current $80 billion enterprise value.
Contrast that with Magellan, which is on pace to increase its $20 billion enterprise value by 8% given its current backlog of $1.5 billion. Furthermore, Magellan has pointed out that while it has several high-return projects in its backlog that should fuel 8% distribution growth this year and next, its more recent additions carry lower initial returns and higher risk. As a result, earnings and cash flow growth could slow considerably in 2019 and 2020, which might cause it to grow at a much slower rate than Enterprise.
The total package for investors
While both boast a similarly strong financial profile, Enterprise Products Partners has a lower valuation, higher yield, and greater visibility into future growth than Magellan. Those three factors, in my opinion, make it the better buy between the two because they should enable Enterprise to deliver a higher total return over the next few years.
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