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

Recession and inflation resistant businesses are currently at a premium, thanks to four-decade high inflation and growing calls for a recession sometime within the next year or two.

On top of that, rapidly rising interest rates mean that income-oriented investments need to offer high yields in order to properly compensate investors for the additional risk they are taking by forgoing treasuries in favor of these income producing risk assets.

Last, but not least, these payout yields need to be safe as many income-focused investors today are either in or nearing retirement and need to be able to receive dependable income from their investments through good times and bad. Enbridge (NYSE:ENB) and 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 such businesses.

In this article, we will compare them side by side to see which one is a better buy at the moment.

#1. Enbridge Vs. Williams Companies – Business Model

ENB’s asset portfolio is one of the finest in the midstream 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 also claiming the title as North America’s number one natural gas distributor.

Its cash flows are utility-like thanks to the fact that 98% of its cash flows are linked to commodity price proof contracts, the vast majority of which are either take-or-pay and/or fee-based. On top of that, ENB’s contracts are also highly likely to weather any severe downturns in the energy industry given that 95% of its counterparties are investment grade or equivalent.

Meanwhile, WMB also has a strong portfolio. In contrast to ENB that has a lot of exposure to crude oil, WMB is a pure-play bet on natural gas midstream infrastructure. Given that it is cleaner, plentiful, and relatively cheap, natural gas is considered to have a brighter long-term future than crude oil. On top of that, WMB is not just a play on natural gas, it is a natural gas powerhouse, handling nearly one-third of all the natural gas that is used in the United States each day.

Its portfolio spans 14 key supply areas with natural gas transmission pipelines that are ideally positioned in densely populated areas in order to serve both domestic and international growth. Meanwhile, it is able to pursue very high returning and relatively low risk incremental growth projects to further enhance its pipeline network that have earned it a weighted average 18.9% return on invested capital from 2018-2021 (note that this period includes during the COVID-19 energy market collapse).

Both companies’ assets weathered past commodity price volatility (for example, during the COVID-19 energy market crash of 2020) very well, hardly any impact seen to EBITDA.

Overall, both businesses have very high-quality asset portfolios, but we give a slight edge to ENB simply due to its superior size and diversification, which we believe will result in greater risk-adjusted cash flows over the long-term.

#2. Enbridge Vs. Williams – Balance Sheet

Both businesses have solid balance sheets. ENB boasts an industry-leading BBB+ credit rating, while WMB is not far behind with a BBB credit rating. While ENB’s leverage ratio is quite a bit higher than WMB’s, this is not a big concern given that its asset portfolio is larger, better diversified, and likely a bit higher quality on the net.

With both businesses generating very stable cash flows as well as free cash flow with plenty of liquidity and well-laddered debt maturities, neither has anything to worry about in terms of financial distress or being able to take advantage of growth opportunities.

#3. ENB Vs. WMB – Growth Potential

On the growth front, WMB is expected to grow its dividend per share at a 5.2% CAGR through 2026, whereas ENB is expected to grow its dividend per share at just a 2.7% CAGR over the same time frame according to consensus analyst estimates.

That said, ENB’s management estimates that it can continue growing at a mid-single-digit rate given its significant investment opportunities across its well-diversified portfolio that 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 power production projects.

While we think both businesses should be able to post at least mid-single growth rates, given that WMB is retaining more cash flow with which to grow the business and deleverage the balance sheet (thereby reducing interest expenses), we expect them to probably slightly outperform ENB in the growth department.

#4. ENB Vs. WMB – Valuation

Both ENB and WMB look at least somewhat undervalued relative to their historical averages on both an EV/EBITDA and P/DCF basis.

ENB’s Metrics	Current	5-Yr. Average
EV/EBITDA	12.61x	12.71x
P/DCF	10.25x	10.94x
Dividend Yield	6.50%	6.63%

WMB’s Metrics	Current	5-Yr. Average
EV/EBITDA	10.04x	10.69x
P/DCF	8.79x	9.30x
Dividend Yield	5.5%	6.2%

This is particularly remarkable given that conditions for the oil and gas industry are very strong right now with strong demand and constrained supply. Furthermore, with tightening regulations on new pipeline developments and increased pressure in the capital markets on fossil fuels related businesses, the ability to build new competing infrastructure is getting more challenging. This means that at the same time that ENB’s and WMB’s high quality, strategically located, and well-diversified portfolios are in high demand, the ability to increase supply is being severely constrained. As a result, we think both companies are attractively priced at the moment.

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

Investor Takeaway

It is very difficult to pick between these two companies. On the one hand, you have ENB with a phenomenal dividend growth track record spanning 27 years, a higher current yield by 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 natural gas focused portfolio, sky-high returns on invested capital, a lower leverage ratio, better dividend per share growth potential moving forward due to having a lower payout ratio, and a significantly cheaper valuation on both a P/DCF and EV/EBITDA basis.

While we think both stocks warrant a Strong Buy right now after the latest pullback and think picking both is a prudent approach, if we had to pick just one, it would be ENB simply due to the higher yield, better track record, and slightly greater safety as we head into murky economic waters.