2023-06-20 08:00:00 ET
Summary
- Retiring on dividends provides a more predictable and reliable passive income compared to relying on portfolio size.
- Enterprise Products Partners and ONEOK are two stocks that offer high current yields and solid growth potential.
- We compare them side by side and discuss which is the better buy today.
Retiring on dividends rather than relying on portfolio principal provides several distinct advantages.
First, unlike the unpredictable nature of stock market performance, passive income generated through dividends is more predictable and reliable. This predictability makes it easier to gauge whether your portfolio will be sufficient to cover your retirement expenses. In contrast, relying solely on portfolio size to fund retirement leaves more uncertainty.
Second, retiring on dividends provides investors with peace of mind. If the stock market crashes, a portfolio's value can sharply decline, potentially jeopardizing retirement plans. However, when living off dividends from stable, low-risk companies, you can rest assured that your passive income will continue to arrive, supporting your lifestyle indefinitely.
In this article, we will compare two stocks - Enterprise Products Partners ( EPD ) and ONEOK ( OKE ) - that not only provide this reliable passive income, but also offer high current yields, thereby potentially accelerating your progress towards financial independence. Furthermore, their solid growth potential means that they should help protect your income stream from the corroding effect of inflation.
EPD Stock Vs. OKE Stock: Business Model
EPD is a midstream MLP with a diverse asset base and substantial geographic footprint, giving management numerous investment opportunities in organic growth projects and strategic bolt-on acquisitions. They collect a wide range of hydrocarbons from various sources in major producing regions and supply them to an array of end markets.
EPD excels in its natural gas liquids business segment and has a robust petrochemicals unit that transforms cost-effective U.S. molecules into valuable exports. With the anticipated increase in U.S. NGL exports in the coming years, EPD is well-positioned to benefit from this growth trend due to its extensive related assets that span the NGL value chain.
EPD Portfolio (Investor Presentation)
EPD generates very stable cash flows across macroeconomic and energy industry conditions thanks to its long-term fixed fee commodity price resistant contracts that generate most of its EBITDA. Management has also done an exceptional job of running the business in a prudent and conservative manner while generating annual distribution growth for a quarter century. As a result, EPD has crushed the broader market over the long term:
OKE's business model is about to be substantially transformed as it recently reached an agreement to acquire Magellan Midstream Partners ( MMP ). This acquisition would significantly diversify OKE's business model and also significantly increase its returns on invested capital given that MMP has some of the very highest returns on invested capital in the sector. That said, the deal is not yet a lock given that there is some significant pushback from MMP unitholders due to the heavy expected tax hit that long-term MMP investors are going to face.
Nevertheless, we are going to analyze OKE based on the assumption that the deal goes through.
As the graphic below illustrates, OKE's post-deal business model will present a strong midstream presence in middle America, which is considered to be at the lowest risk of near-term disruption from electric vehicles and other renewable energy products. Moreover, it will combine OKE's top tier NGL and natural gas assets with MMP's refined products and crude oil assets to make OKE a very well-diversified midstream giant.
OKE/MMP Combination (Investor Presentation)
Like EPD, OKE will generate the vast majority of its cash flows from fixed-fee, commodity price resistant contracts that will make it a stable cash flow generator across different business and energy industry cycles. The quality of its assets also have helped it to deliver exceptional dividend consistency over the years, with both OKE and MMP delivering remarkably consistent payout growth to investors:
EPD Stock Vs. OKE Stock: Balance Sheet
Both EPD and OKE have strong balance sheets. EPD recently earned the distinction of being the only midstream business with an A- credit rating, reflecting its very conservative approach to leverage. The partnership's leverage ratio is currently at 3.0x, right in the middle of its new, ultra-conservative leverage ratio target range of 2.75x and 3.25x. On top of that, its balance sheet is very flexible, with $4 billion in liquidity and a 20-year weighted average term to maturity on its debt.
OKE's BBB credit rating was reaffirmed by S&P after the deal was announced. Moreover, S&P and Moody's signaled that they are positive on the deal from a credit rating standpoint, as the improved asset and geographic diversification, scale, and returns on invested capital should all make OKE a safer bet. Moreover, management forecasts that OKE will have a 4.0x pro forma 2024E leverage ratio and a sub-3.5x leverage ratio by 2026, giving it a very conservative balance sheet trajectory.
EPD Stock Vs. OKE Stock: Distribution/Dividend Outlook
EPD has a very safe distribution, with a 1.76x coverage ratio expected in 2023. As a result of this strong coverage and EPD's fortress balance sheet, management is expected to be a bit more aggressive with capital returns moving forward. As a result, EPD is forecast by analysts to grow the distribution per unit at a 5% CAGR over the next three years at least.
OKE, meanwhile, is expected to cover its dividend by 1.79x in 2024 (its first full year post-merger) and as a result should be able to grow its dividend at a mid-single digit CAGR moving forward. Analysts currently project it to grow its dividend at a 5.7% CAGR through 2027.
Both payouts look very safe at the moment and are likely to grow at a pace that is equal to or above inflation for the foreseeable future.
EPD Stock Vs. OKE Stock: Valuation
When it comes to valuation, EPD has an edge on OKE, with a 7.3x P/DCF ratio and a 9.22x EV/EBITDA ratio compared to OKE's 8.6x P/DCF ratio and 10.17x EV/EBITDA ratio. EPD's distribution yield is also higher at 7.7% compared to OKE's 6.3% yield.
That said, OKE is a C-Corp that issues a 1099 tax form whereas EPD is an MLP that issues a K-1 tax form, which makes OKE more palatable to a wider range of potential investors. Moreover, OKE is expected to have a bit higher growth than EPD moving forward, which warrants a slight valuation premium. Last, but not least, OKE's acquisition of MMP warrants a bit of a premium too given that its assets throw off such high returns on invested capital and also generate considerable free cash flow. Prior to the acquisition MMP's units typically commanded an EV/EBITDA multiple that was a few turns higher than EPD's, so this further strengthens the case for OKE to have a higher valuation than EPD has.
Overall, we see both of these stocks as attractively valued at the moment and do not see one as being considerably cheaper than the other relative to their assets and tax structures.
EPD Stock Vs. OKE Stock: Investor Takeaway
Overall, we prefer EPD to OKE given that its balance sheet is stronger, its business model is as good as any in the industry, its track record and management are phenomenal, its growth outlook is solid, and its valuation is cheaper than OKE's on an absolute basis. Moreover, its distribution yield is a solid 140 basis points higher, making it a superior passive income generator.
That said, for retirees looking to invest in a high yield dividend growth stock in a retirement account, OKE is a better option given that its 1099 tax form is more suitable to such an account than EPD's K-1s and potential for generating UBTI. Moreover, OKE's dividend yield is still quite attractive and the growth should be a bit stronger with OKE than with EPD moving forward.
We rate both stocks as low risk Buys.
For further details see:
High Yielding Dividend Growers For A Dream Retirement: Enterprise Products Vs. ONEOK