TRP - Better High-Yield SWAN Stock: Enbridge Or TC Energy?

2023-12-27 07:15:00 ET

Summary

• Enbridge and TC Energy are attractive dividend growth stocks for retirees with defensive and durable business models.
• As a result, we view them both as dream retiree dividend stocks.
• We compare them side-by-side and offer our take on which is the better buy today.

Enbridge (ENB) and TC Energy (TRP) are two vaunted energy midstream infrastructure businesses ((AMLP)) that offer an attractive combination of defensive and durable business models, strong balance sheets, safe and growing dividend payouts, and attractive dividend yields and valuations. This makes them dream dividend growth stocks for retirees. In this article, we will compare them side-by-side and offer our take on which is the best buy right now.

ENB Stock & TRP Stock: Defensive and Durable Business Models

Both ENB and TRP have defensive and durable business models that consist of high-quality, well-located, and well-diversified midstream energy infrastructure. Both companies have carefully built and maintained essential midstream assets that are not only vital to the energy infrastructure of North America but also inherently resistant to competition. This is primarily because the energy sector, particularly midstream operations, requires highly specialized, large-scale infrastructure that cannot be easily replicated (especially in the current environment where getting regulatory approvals for new pipeline projects is increasingly difficult). Moreover, the essential nature of energy distribution and the contractual and regulated framework within which these companies operate provide a strong defense against macroeconomic volatility.

ENB is perhaps best known for operating the Mainline pipeline system, a mission-critical pipeline that connects Canadian oil exports to U.S. refineries. ENB's recent acquisition of natural gas utilities from Dominion Energy (D), further diversifies its revenue streams and strengthens its position in the natural gas infrastructure space. This move not only expands ENB's footprint in the midstream energy sector but also makes it more resilient against market volatility by giving it greater exposure to regulated utility assets. The strength of ENB's business model is evidenced by the fact that 98% of its EBITDA comes from long-term take-or-pay contracts and regulated utility assets, guaranteeing stable cash flows regardless of economic conditions.

TRP, in contrast to ENB's heavy focus on energy-related pipelines, is heavily focused on natural gas pipelines. About 75% of its EBITDA comes from its natural gas operations across the U.S., Canada, and Mexico, with the remaining 25% from its liquids pipelines and power and storage assets. TRP's Keystone crude pipeline and the NGTL and Mainline natural gas pipelines are its crown jewel assets as these pipelines not only offer significant transportation capacity but are also located in such a manner that they are critical to North America's energy infrastructure. Moreover, TRP's business model is considered to be quite defensive due to its long-term, fixed-fee contracts, and regulatory protections, protecting TRP's cash flows against energy market fluctuations.

In summary, both Enbridge and TC Energy have business models that are not only defensive against economic downturns but also competitively positioned to maintain their profitability over the long term. Their large-scale, essential infrastructure and diversified asset portfolios make them attractive candidates for a retirement-focused dividend growth portfolio and neither enjoys a particularly strong edge over the other, though we slightly prefer TRP's greater focus on natural gas relative to oil-related energy commodities as it has a more robust long-term growth runway.

ENB Stock & TRP Stock: Strong Balance Sheets

Once again, both ENB and TRP boast strong balance sheets with BBB+ credit ratings from S&P, though ENB has a slight edge here with a stable outlook whereas TRP has a negative outlook from the agency.

ENB's balance sheet is marked by a very well-laddered debt maturity that gives it access to a significant amount of very low-cost fixed-rate debt for many decades to come, resulting in a low-weighted average cost of debt for the company for the foreseeable future. Moreover, ENB's net debt to EBITDA ratio remains within its targeted range, and their recent meaningful increased exposure to regulated assets gives them additional upside optionality on their leverage ratio with rating agencies. Last, but not least, ENB's substantial liquidity and cash flow generation net of dividends gives them plenty of financial flexibility to continue investing opportunistically in growth projects, acquisitions, and/or share buybacks in order to maximize long-term shareholder returns.

TRP also enjoys a strong credit rating, a weighted average term to maturity on its debt of 20 years, substantial liquidity and cash flow generation net of dividends, and a relatively low and stable cost of debt profile. However, its leverage ratio is also higher than the company and the rating agencies want it to be. As a result, they are trying to sell assets aggressively to bring down the leverage ratio. Recently, TRP strategically sold a $3.9 billion stake in its Columbia Gas Transmission and Columbia Gulf Transmission systems, which enabled it to make significant progress toward its deleveraging goals and it plans to execute several billion dollars' worth of additional asset sales in 2024 to fully bring its leverage ratio within the company's and rating agencies' target ranges.

In summary, while we think both businesses have strong balance sheets and little risk of financial distress, ENB wins this comparison as it has a bit more financial flexibility at the moment and is not dependent on near-term asset sales to preserve its impressive BBB+ credit rating.

ENB Stock & TRP Stock: Safe and Growing Dividend Payouts

Both ENB and TRP have safe and growing dividend payouts. ENB has a 28-year dividend growth streak, giving it the longest in the midstream sector, whereas TRP is not too far behind with its 23-year dividend growth streak. Note that both companies declare their dividends in Canadian Dollars, so this results in some volatility in their U.S. Dollar-denominated dividend payouts even as their Canadian Dollar payouts have consistently grown over the past several decades.

Looking ahead, both ENB and TRP are poised to continue growing their dividends at a steady rate. ENB's dividend payout is currently covered ~1.5x by Distributable Cash Flow, offering a significant margin of safety for the dividend, especially when considering its stable and defensive cash flow profile and strong balance sheet. Moving forward, ENB management projects a 3-5% dividend per share CAGR, and analysts expect it to come in at the low end of that range over the next four years. This implies that investors can expect their dividend income to grow roughly in line with inflation moving forward, meaning that their purchasing power on the current payout will likely be preserved (though non-Canadian investors will still have some currency risk).

TRP has a very similar outlook to ENB's, with management also forecasting a 3-5% dividend per share CAGR for the foreseeable future, though analysts are a bit more bullish on TRP's dividend growth than they are ENB's as they forecast a ~4% CAGR over the next four years for TRP's dividend per share. This implies that TRP should offer inflation-beating dividend growth for the foreseeable future, making it a particularly attractive income machine. Moreover, TRP's dividend looks even safer than ENB's as its Distributable Cash Flow coverage ratio for 2023 is expected to be ~1.8x, though its balance sheet does require a bit more near-term attention than ENB's does, so much of that excess cash flow will be needed to address balance sheet and capital expenditure needs.

ENB Stock & TRP Stock: Attractive Dividend Yields and Valuations

When it comes to valuation and dividend yields, both ENB and TRP continue to look quite attractive, as they both trade at a meaningful discount to their historical averages. As the table below illustrates, TRP is a little bit cheaper than ENB on both an EV/EBITDA and P/DCF basis. However, ENB has a slightly higher dividend yield than TRP does.

Investor Takeaway

Both ENB and TRP look like ideal dividend growth stocks for retirees as they offer very defensive, mission-critical business models that should remain viable for many years to come, solid balance sheets that should keep them out of financial trouble across full market cycles, safe dividend payouts that should continue to grow on pace with or faster than inflation, and attractive valuations and current dividend yields that provide a large amount of current income along with a high likelihood of long-term capital appreciation.

That being said our top choice between these two right now is definitely TRP as it is slightly cheaper on an EV/EBITDA and P/DCF basis, has stronger dividend growth potential, and also has a better overall asset portfolio in our view, especially given its greater focus on natural gas.

Tax information: while both businesses issue 1099 tax forms, keep in mind that both are Canadian businesses and therefore have some foreign tax withheld on their dividend payments (unless held by a US investor in a retirement account). Note that this is not tax advice and I am not a tax expert; this is just my opinion based on my experience.

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