Enbridge Vs. Williams Companies: Better High Yield SWAN Buy (NYSE:ENB)

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Recession- and inflation-resistant companies are now at a higher level, thanks to four-decade-high inflation and growing demands for a recession at some point in a year or two.

In addition, interest rates are growing rapidly it means that income-oriented investments must offer high returns to adequately compensate investors for the additional risk they are taking on by giving up cash in favor of these income-producing risky assets.

Last but not least, these paybacks need to be secure, as many income-focused investors today are retired or close to retirement and should be able to receive reliable income from their investments during good and bad times. moments. Enbridge (NYSE: ENBand The Williams Companies (NYSE: WMB), with dividend yields of 6.5% and 5.5%, respectively, strong growth profiles, and very solid balance sheets and cash flow profiles, are clearly these businesses.

In this article, we will compare them side by side to see which is the best buy right now.

# 1. Enbridge Vs. Williams Companies – Business Model

ENB’s asset portfolio is one of the best in the average space. It has the largest crude oil pipeline network in North America and the second largest natural gas transmission pipeline network in the United States, while claiming the number one natural gas distributor title in North America.

Its cash flows are similar to profits thanks to the fact that 98% of its cash flows are linked to commodity-proof contracts, the vast majority of which are based on commissions and / or commissions. . In addition, ENB’s contracts are very likely to withstand the serious falls in the energy sector, as 95% of their counterparts are investment grade or equivalent.

Meanwhile, WMB also has a solid portfolio. Unlike the ENB which has a lot of exposure to crude oil, WMB is a pure bet for the natural gas infrastructure. Because it is cleaner, abundant, and relatively inexpensive, natural gas is considered to have a brighter long-term future than crude oil. In addition, WMB is not just a set of natural gas, it is a natural gas plant, which manages nearly a third of all the natural gas used every day in the United States.

Its portfolio covers 14 key areas of supply with natural gas transmission pipelines that are ideally located in densely populated areas in order to serve national and international growth. Meanwhile, it is able to carry out incremental growth projects of very high yield and relatively low risk to further improve its pipeline network which have allowed it to obtain a weighted average return of 18.9% of the capital invested between 2018- 2021 (note that this period includes during COVID-19). 19 collapse of the energy market).

The assets of both companies outperformed commodity price volatility very well (e.g., during the fall of the 2020 COVID-19 energy market), with almost no impact on EBITDA.

In general, both companies have very high quality asset portfolios, but we give ENB a slight advantage simply because of its superior size and diversification, which we believe will result in greater risk-adjusted cash flows in the long run. .

# 2. Enbridge Vs. Williams – Balance

Both businesses have solid balance sheets. ENB has an industry-leading BBB + credit rating, while WMB is not far behind with a BBB credit rating. While ENB’s leverage ratio is slightly higher than WMB’s, this is not a major concern as its asset portfolio is larger, more diversified and probably a bit more quality on the net. .

Both companies generate very stable cash flows, as well as a free cash flow with a lot of liquidity and well-distributed debt maturities, neither of which has to worry about financial difficulties or being able to take advantage of growth opportunities. .

# 3. ENB vs. WMB – Growth potential

In terms of growth, WMB is expected to grow its dividend per share to 5.2% CAGR by 2026, while ENB is expected to grow its dividend per share by only 2.7% CAGR during the same time period, according to estimates by consensus analysts.

That said, ENB’s management estimates that it can continue to grow at a one-digit average rate given its significant investment opportunities in its well-diversified portfolio, which also includes a growing portfolio of renewable energy production assets. .

WMB also has numerous attractive growth investment opportunities that are also beginning to include some renewable energy production projects.

While we believe that both companies should be able to post at least average growth rates, given that WMB maintains more cash flow with which to grow the business and offset the balance sheet (thus reducing interest expenses), we hope that probably little bit. exceed the ENB in ​​the growth department.

# 4. ENB vs. WMB – Valuation

Both ENB and WMB appear to be at least slightly undervalued relative to their historical averages in both EV / EBITDA and P / DCF.

ENB metrics Current 5 years. Medium
EV / EBITDA 12.61x 12.71x
P / DCF 10.25x 10.94x
Dividend yield 6.50% 6.63%

WMB metrics Current 5 years. Medium
EV / EBITDA 10.04x 10.69x
P / DCF 8.79x 9.30x
Dividend yield 5.5% 6.2%

This is especially noticeable considering that conditions for the oil and gas industry are very strong right now with strong demand and limited supply. In addition, with tightening regulations on new pipeline developments and increasing pressure on capital markets on fossil fuel-related companies, the ability to build new competing infrastructure is becoming increasingly difficult. This means that while high-quality, strategically located and well-diversified ENB and WMB portfolios are in high demand, the ability to increase supply is very limited. As a result, we believe both companies are attractively priced right now.

That said, we believe that WMB generally wins in the valuation department, as it is considerably cheaper in both EV / EBITDA and P / DCF and is also slightly cheaper relative to its own recent historical averages.

Takeaway inverter

It is very difficult to choose between these two companies. On the one hand, you have ENB with a phenomenal dividend growth trajectory spanning 27 years, a higher current yield of about 100 basis points and a slightly higher credit rating backed by a larger and more diverse asset portfolio.

On the other hand, you have WMB with a portfolio focused on natural gas, very high returns on invested capital, a lower leverage ratio, better potential for dividend growth per share due to having a lower payout ratio and a significantly cheaper valuation in both P / DCF and EV / EBITDA.

While we believe both stocks justify a strong buy right now after the last setback and we think choosing both is a prudent approach, if we had to choose just one, it would be ENB simply because of the higher performance, the better history and a little bigger. safety as we head into turbulent economic waters.

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