Passive Income: Williams Companies’ 5.9% Yield Or Enbridge’s 7.0%

Both The Williams Companies (NYSE:WMB) and Enbridge (NYSE:ENB) are investment grade, high-yield midstream businesses. WMB is cheaper on an EV/EBITDA basis, but ENB has a higher credit rating and higher dividend yield.

In this article, we will compare them side by side and offer our take on which one is a better buy.

WMB Vs. ENB – Balance Sheet

Both WMB (Baa2 from Moody’s with a stable outlook) and ENB (BBB+ from S&P with a stable outlook) have investment grade credit ratings which implies they both have solid balance sheets.

That said, investors in WMB have very little to worry about either, with a solid leverage ratio of 3.82x and plenty of liquidity. Furthermore, management expects to continue deleveraging the balance sheet in the second half of the year, aspiring to reach a 3.60x leverage ratio by year-end. This marks an impressive 1.2x leverage ratio improvement since 2018.

While WMB’s balance sheet is certainly in fine condition and the company is at little risk of financial distress as a result, ENB’s slightly higher credit rating gives it a leg up. On top of that, with nearly all of its debt locked in at fixed interest rates and a substantial percentage of its debt not maturing until the 2030s, 2040s, 2050s, 2060s, and even 2080s, its debt maturity schedule is exceptionally well laddered. As a result, ENB has a fortress balance sheet that sets it up to invest opportunistically and even aggressively while facing little concern of financial distress.

WMB Vs. ENB – Business Model

WMB owns high quality midstream assets that are entirely focused on natural gas. Given natural gas’ bright future according to many analysts, this sets up WMB to be a major midstream player for decades to come. Not only that, but it plays a mission-critical role in the U.S. energy industry by servicing approximately one-third of all the natural gas that is used in the United States.

Moreover, given that it services 14 key supply areas with transmission pipelines located near densely populated regions, it boasts significant and strategic geographic diversification.

In contrast to WMB’s focus on natural gas, ENB is much more diversified among energy commodities. Its massive scale and impressive diversification is evident in its status as the owner of:

• the second longest natural gas transmission pipeline network in the United States
• North America’s largest natural gas distribution business
• the longest crude oil pipeline network in North America
• a fairly small, but rapidly growing portfolio of wind and solar energy production assets

Both businesses are also quite commodity price resistant. WMB’s stability is evident in the fact that it has grown its adjusted EBITDA, adjusted earnings per share, AFFO, and dividend per share every year since at least 2018, including through the fierce energy COVID-19 headwinds of 2020. Meanwhile, ENB generates highly secure cash flows with 98% of its contracts being commodity price resistant and 95% of its cash flow being backed by contracts with investment grade counterparties.

Overall, we give a slight edge to ENB here given its superior scale and diversification and the strength of its counterparties, though both business models are very solid.

WMB Vs. ENB – Dividend Safety

WMB’s dividend coverage ratio is exceptionally strong. For 2022, analyst consensus estimates put it at 2.1x and analysts expect its 2023 coverage ratio on its forecasted 2022 dividend payout to be 2.1x as well.

Meanwhile, ENB’s dividend coverage ratio is not quite as strong, but is still very conservative at 1.56x in expected in 2022 and 1.55x expected in 2023. Another big feather in ENB’s cap is that it has grown its dividend every year for the past 27 years. Meanwhile, WMB has only grown its dividend for five consecutive years (including what it is on pace to do in 2022).

Overall, however, WMB’s significantly superior coverage ratio makes it a safer dividend, though we have little to no concerns about ENB’s dividend safety.

WMB Vs. ENB – Track Record

When it comes to track record, ENB totally crushes WMB with a very impressive total return track record compared to a rather unimpressive one for WMB:

That said, WMB has generated strong risk-adjusted returns on organic growth projects on its pipeline network in recent years. Between 2018 and 2021, its return on invested capital has averaged 18.9%, which is particularly impressive given that it includes the COVID-19 energy market headwinds of 2020.

Nevertheless, ENB is the clear winner in this category given its superior total returns over time.

WMB Vs. ENB – Risks And Catalysts

ENB and WMB both face very similar risks and catalysts given that they are in the same industry. As midstream businesses with strong counterparties, high quality and well-diversified assets, long-term contracts that are pretty commodity price and inflation resistant, their near-term cash flow profiles are quite predictable and stable.

However, if energy prices were to soar and remain higher for a lengthy period of time, it would likely mean strong increases to cash flows in the future as new growth opportunities would likely open up and recontracting terms would probably be very favorable for them. In contrast, if energy prices were to plunge and remain lower for a prolonged time period, it would likely mean that cash flows would decline over time as growth opportunities would be more scarce, counterparties might begin to struggle, and ultimately recontracting terms would be less favorable for them.

Another big difference is that WMB is focused entirely on natural gas whereas ENB is more diversified. As a result, WMB’s fortunes are more closely tied to the state of the natural gas industry, whereas ENB is more of a play on the broader midstream sector.

WMB Vs. ENB – Valuation

When it comes to their relative valuations, WMB looks clearly cheaper across each of the primary midstream valuation metrics. However, ENB’s dividend yield is higher, which many midstream investors put a premium value on. Overall, however, we give a slight edge to WMB here as its EV/EBITDA multiple and P/DCF multiples are convincingly cheaper than ENB’s.

Valuation Metric	WMB	ENB
Dividend Yield	5.9%	7.0%
Dividend Yield (5-Yr Avg)	6.3%	6.7%
EV/EBITDA	9.4x	12.3x
EV/EBITDA (5-Yr Avg)	10.6x	12.6x
P/DCF (2022)	8.1x	9.8x
P/DCF (2023)	8.1x	9.1x

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Investor Takeaway

ENB has a slightly stronger balance sheet and a better diversified asset portfolio. Moreover, its track record for generating total returns and dividend growth crushes WMB’s. Its dividend yield is also 110 basis points superior to WMB’s.

That said, WMB is considerably cheaper on an EV/EBITDA and P/DCF basis, it benefits from being a pureplay in natural gas, and its balance sheet is still in fine shape. On top of that, its dividend is covered more than 2x by distributable cash flows, giving it a very conservative dividend profile.

Overall, picking between the two really depends on whether or not investors already have a diversified portfolio of midstream businesses. If investors already hold several midstream and energy businesses and want pureplay exposure to natural gas, WMB is a great option. If investors are merely looking for a reliable blue chip dividend grower to give them exposure to the midstream sector, ENB is hard to beat.

Note: ENB is a Canadian company whereas WMB is a U.S.-based company. Both issue 1099 tax forms instead of K1s. Keep in mind the tax ramifications before investing in either one.

We rate both as Buys at the moment.