CA - Yields Up To 9.2%: Lifelong Passive Income From Enbridge And MPLX

2024-01-21 16:00:00 ET

Summary

• We share the four qualities that make a dividend stock worth investing in for generating lifelong passive income.
• We evaluate ENB and MPLX against those qualities.
• We share why we believe only one of these is worth buying today.

As we recently discussed , investing in individual dividend stocks can provide a financially comfortable retirement. However, the trick is to find the right kinds of dividend stocks, particularly ones that pass this four-part test :

1. Defensive and durable business model
2. Strong balance sheet
3. Safe and growing payout
4. High current yield

Both Enbridge ( ENB ) and MPLX ( MPLX ) pass this test with flying colors, thanks to their blue-chip, full-integrated midstream (AMLP) business models, strong investment grade credit ratings, strong payout coverage, impressive payout growth track records, and attractive current yields. As a result, we think that they qualify for a place in a well-diversified dividend stock portfolio focused on delivering lifelong income to 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 & MPLX Stock: Business Models

ENB has a defensive and durable business model consisting of high-quality, well-located assets that are virtually all either long-term contracted or regulated and have investment-grade counterparties (98% of its EBITDA is derived from long-term, take-or-pay contracts and regulated utility assets). As a result, ENB generates very stable cash flows through good times and bad.

ENB's crown jewel asset is its Mainline pipeline system, a mission-critical piece of infrastructure for facilitating Canadian oil exports to U.S. markets. It services over 70% of Canada's export capacity and is connected to U.S. refineries that have a steady demand for heavy oil, making it a very valuable piece of energy infrastructure.

The recent strategic acquisition of natural gas utilities from Dominion Energy ( D ) underscores ENB's commitment to diversifying its revenue streams and bolstering its footprint in the natural gas space. Moreover, it improves its exposure to regulated utility assets, making its cash flows even more durable and more stable than they already were. Overall, ENB's business mix post-acquisition is:

• 50% in liquids pipelines
• 25% in gas transmission
• 22% in gas distribution
• 3% in renewables.

Looking ahead, ENB's growth trajectory is supported by its diversified portfolio, which in addition to its midstream and utilities businesses also includes a renewable power production segment. As a result, ENB has a near-limitless number of places to deploy capital to continue driving long-term growth.

MPLX, meanwhile, focuses primarily on its Logistics and Storage (L&S) and Gathering and Processing (G&P) segments and services natural gas, NGLs, and crude oil. Another important aspect of MPLX's business model is its symbiotic relationship with Marathon Petroleum Corporation ( MPC ), which gives it growth opportunities and steady demand from a high-quality counterparty. Moreover, given that MPC is MPLX's largest unitholder, MPC is incentivized to push MPLX to grow its distribution aggressively in order to provide a steady stream of cash flow to MPC along with other unitholders,

That being said, there is also always the risk that MPC may take advantage of MPLX unitholders in order to serve its own interests. This has already been evidenced somewhat through the Andeavor Logistics deal several years ago when MPC sold it to MPLX at a price that ultimately served to destroy unitholder value at MPLX.

Overall, MPLX's business model is quite solid as its diversified asset portfolio is underpinned by fee-based contracts that guarantee a steady income stream, including in its G&P segment. Moreover, management has made the strategic decision in recent years to slash growth capital expenditures in order to high-grade its investments and free up additional cash flow for debt reduction, unit repurchases, and increased distributions.

MPLX's main growth avenue right now stems from potential further asset dropdowns from MPC in the Permian Basin, as it continues to seek ways to bolster its strength in the region. Another area of potential growth for MPLX is in the Northeastern U.S., where it is working to establish a significant NGL market hub.

ENB Stock & MPLX Stock: Balance Sheets

ENB has one of the best credit ratings in the midstream sector, coming in at BBB+ or equivalent from all of the credit rating agencies. As a result, it should be no surprise that ENB's balance sheet is characterized by well-laddered debt maturities, mostly fixed-rate debt, and significant liquidity. ENB's debt ratio is also on the low end of its 4.5-5.0x range, which is quite reasonable for a company with the cash flow stability and portfolio diversity of ENB.

MPLX, meanwhile, also has a strong balance sheet, as evidenced by its BBB credit rating from S&P. With a leverage ratio that has improved from 3.7x in 2019 to 3.4x in Q3 2023, MPLX has consistently made its strong balance sheet even stronger in recent years, while simultaneously being quite generous with its capital returns to unitholders. The strength of its balance sheet is also evidenced by its well-laddered debt maturities and significant free cash flow generation, combining with its balance sheet liquidity to give it plenty of financial flexibility moving forward.

ENB Stock & MPLX Stock: Dividend/Distribution Outlooks

Both ENB and MPLX have safe and growing dividend/distribution payouts. ENB leads the industry with its 27-year dividend growth streak, and its dividend appears not only safe but likely to continue growing for years to come. With a 65.7% expected payout ratio (on a DCF basis) in 2023, a very stable cash flow profile, and a strong balance sheet, there is very little chance of it having to cut its dividend anytime soon, and plenty of room remains for them to keep growing it for years to come. Analysts agree, given the 4.5% DCF per share CAGR and 3.1% dividend per share CAGR forecast through 2027.

MPLX, meanwhile, has a solid 11-year distribution growth streak of its own, and also appears poised to continue its own growth streak for quite some time. With a 67% expected DCF payout ratio in 2023, a fairly stable cash flow profile, and a solid balance sheet, MPLX has plenty of flexibility to continue increasing its distribution each year for the foreseeable future. Analysts seem quite bullish on MPLX's prospects, forecasting a 6.0% distribution per unit CAGR through 2027. However, it is only expected to grow its DCF per unit at a 2.8% CAGR over that span.

The difference between ENB's projected DCF and dividend growth rates and MPLX's projected DCF and dividend growth rates reflect the two companies' differing capital allocation strategies: ENB will likely grow its dividend at a pace slightly below its DCF per share growth rate in the coming years as it continues to invest aggressively in numerous growth projects. Meanwhile, MPLX has been reducing its growth investments - leading to lower DCF per unit growth rates - while freeing up its excess DCF to accelerate its unitholder capital returns.

ENB Stock & MPLX Stock: Valuations

MPLX is significantly cheaper than ENB on a head-to-head basis across the EV/EBITDA, P/DCF, and Dividend Yield metrics. That being said, ENB is much cheaper than MPLX is relative to their own histories, as ENB trades at a large discount to its 5-year average EV/EBITDA and dividend yield metrics, whereas MPLX trades at a premium on both accounts.

The reason why ENB trades at such a premium to MPLX historically is because:

1. It has a higher credit rating.
2. It has a longer dividend growth track record
3. Most importantly, its asset portfolio is considered to be much higher quality, and in particular, it owns a large number of regulated assets, which typically command significant premiums to the contracted and non-contracted midstream assets that dominate MPLX's asset portfolio.

Investor Takeaway

Both ENB and MPLX pass the test of a quality dividend stock to fund a retirement with passive income thanks to their defensive and durable business models, strong balance sheets, safe and growing payouts, and high current yields. That being said, we view MPLX as a Hold right now due to its valuation trading in-line with its historical averages despite interest rates remaining elevated. Meanwhile, we view ENB as a Buy right now given the discount to its historical average valuations and its improved defensive and growth profiles in the wake of the recent natural gas utilities acquisition.

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