To The Moon

Summary

• ENB and PAA/PAGP are leading midstream businesses with attractive yields and strong balance sheets.
• ENB has a better long-term track record than PAA/PAGP, but PAA/PAGP has outperformed ENB recently.
• We compare them side-by-side and explain why we think only one of these is a Buy right now.

Henrik Sorensen

Plains All American Pipeline (NASDAQ:PAA)(NASDAQ:PAGP) and Enbridge (ENB) are two popular midstream dividend growth stocks. While Enbridge has a much more impressive long-term track record.

Plains has significantly outperformed ENB in recent years.

In this article, we will compare them side by side and share our view on why only one is a buy right now.

ENB Vs. PAA/PAGP: Qualitative Comparison

When it comes to balance sheet strength, both are in a strong position, but I would give the edge to ENB due to the fact that it has a slightly higher credit rating. Plains has made a lot of progress in recent years towards deleveraging its balance sheet as it has paid down debt aggressively. As a result, it has successfully brought its leverage ratio down to 3.1 times, which is below its long-term target of 3.25 to 3.75 times. Additionally, it has $3.2 billion worth of committed liquidity, which is significant for a company with an enterprise value of under $26 billion and a market cap of just over $12.5 billion. The company is also generating significant free cash flow, which positions it well to handle any potential challenges that may arise in the near term. This has earned it a credit rating upgrade to BBB from S&P and put it on very solid financial footing.

In contrast, ENB has a BBB+ credit rating from S&P, which is slightly above Plains'. However, its debt-to-EBITDA ratio is 4.7 times, which is significantly higher than Plains'. That said, it is still well within its target range of 4.5 to 5 times. This discrepancy is because ENB's underlying cash flows are almost entirely underpinned by contracted or regulated assets (98% of its cash flows either at cost of service or contracted, over 95% of ENB's customers are investment-grade, 80% of its EBITDA has inflation protections, and only 5% of its debt portfolio is exposed to floating rates).

This compares favorably with Plains, which does not have any regulated assets and relies on either commodity-sensitive or contracted assets to generate its cash flows. As a result, ENB—especially given its recent acquisitions of natural gas utilities—is in many ways a hybrid between a regular utility and a traditional midstream company, whereas Plains is more of a traditional midstream company, and therefore its cash flow stream is considered to be a bit lower quality and less secure.

ENB Vs. PAA/PAGP: Quantitative Comparison

That said, while ENB's cash flows are a bit more defensive, which effectively cancels out its higher leverage and then some, Plains' business is positioned to grow at a brisker pace moving forward, particularly in terms of its dividend. Both companies are likely to grow their distributable cash flow per share at a low to mid-single-digit pace moving forward. However, ENB is at a point where its dividend is likely going to only be in line with its distributable cash flow per share, which puts it at a 3% to at most 5% annualized rate. In contrast, Plains' payout ratio is significantly lower than ENB's. In 2023, it came in at a mere 45.5%, whereas ENB's payout ratio in 2023 was about 65%.

As a result, currently, Plains is positioned to grow its dividend at a much faster rate than its distributable cash flow per share growth rate for the foreseeable future through 2028. Analysts expect the company to grow its dividend per share at a 9.2% CAGR through 2028, in contrast to ENB, which is expected to grow its dividend at just a 3.1% CAGR over that period of time. This makes Plains a much more dynamic and exciting dividend grower than ENB. In fact, when combined with its more attractive forward dividend yield of 7.7% compared to ENB’s 6.8%, its total return profile is much more attractive as well.

Investor Takeaway

Given this comparison, for investors who are willing to take on a bit more risk in pursuit of meaningfully higher returns, Plains is a much more compelling opportunity than ENB. In contrast, ENB is more of a slow and steady, dependable utility-like dividend stock that will likely grow at a rate that meets or slightly beats inflation for years to come. As a result, we rate Plains as medium risk but give it a buy rating, whereas ENB is low risk, but we give it a hold rating at the moment as ENB's expected 3% annualized growth rate combined with its 6.8% dividend yield results in about a 10% annualized total return, which is roughly in line with long-term expected market returns, making us neutral on the stock.

That said, for retirees, I think there is certainly a place for ENB in their portfolio at the current price, but I would not expect meaningful, if any, alpha over the long term, whereas Plains is an interesting opportunity for either a more aggressive retiree investment or for a total returns-focused investor looking to generate market-beating returns. Note that PAA issues a K-1 whereas PAGP issues a 1099 tax form. ENB issues a 1099 tax form, but is a Canadian C-Corp and its dividends are declared in CAD, so keep these items in mind when making investment decisions.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.