Which Pipeline Stock Should You Buy for Dividends?

Enbridge Inc. (TSX:ENB)(NYSE:ENB) and its peer offer yields of up to 6.5%. Which should you buy?

Kay Ng

Kay began investing in dividend stocks around 2008 via the concept of value investing. Since then, she has expanded into growth investing, including in small caps. Her passion for investing has only grown over the years! After graduating from UBC with a BSc in Computer Science, she took university courses in financial markets, finance, and financial accounting. She has contributed her works to Motley Fool, Sure Dividend, and Seeking Alpha.

Published January 10, 2019 3:30 pm EST

Both Enbridge (TSX:ENB)(NYSE:ENB) and TransCanada (TSX:TRP)(NYSE:TRP) are undervalued. Which pipeline company is a better buy right now?

Let’s compare the two.

Which is cheaper?

At about $45.70 per share as of writing, Enbridge trades at a blended price-to-operating-cash-flow ratio (P/OCF) of about 7.3. It’s trading at a meaningful discount of about 26% from its normal multiple.

Thomson Reuters has a mean 12-month target of $52.90 per share on Enbridge, which represents about 16% near-term upside potential.

Pipeline — *Image source: Getty Images.*

At about $53.40 per share as of writing, TransCanada trades at a blended P/OCF of roughly 7.5. It’s trading at a decent discount of about 17% from its normal multiple.

Reuters has a mean 12-month target of $63.50 per share on TransCanada, which represents almost 19% near-term upside potential.

So, from a cash flow multiple perspective, Enbridge is a cheaper stock with greater near-term upside potential. However, based on the analyst consensus from Reuters, TransCanada has greater near-term upside.

Comparing their dividends and dividend growth

At $45.70 per share, Enbridge offers a yield of nearly 6.5%. It has increased its dividend per share for 23 consecutive years with a three-year dividend-growth rate of 13%. Its 2019 payout ratio is estimated to be about 66% of distributable cash flow.

Enbridge’s quarterly dividend per share paid out in the last four quarters was 11.2% higher than it was in the previous four quarters. Enbridge just increased its quarterly dividend per share by 10% year over year, and it aims to increase the dividend by 10% again next year.

Enbridge estimates that its distribution cash flow per share growth will increase by about 5-7% per year after 2020. So, investors should be prepared for slower dividend growth perhaps in the 8% range after 2020.

TRP Dividend data by YCharts. 10-year dividend growth of ENB and TRP.

At about $53.40 per share, TransCanada offers a yield of about 5.2%. It has increased its dividend per share for 18 consecutive years with a three-year dividend-growth rate of 9.9%. Its recent payout ratio was about 45% of distributable cash flow.

TransCanada’s quarterly dividend per share paid out in the last four quarters was 10.4% higher than it was in the previous four quarters. TransCanada aims to increase its dividend per share by 8-10% through 2021.

Investor takeaway

Both Enbridge and TransCanada are discounted and have an S&P credit rating of “BBB+.” They are great income investments that will continue increasing their dividends that are at least double the rate of inflation.

Enbridge has a debt-to-equity ratio of 1.11, which is better than TransCanada’s ratio of 1.76. So, it may be worthwhile to buy Enbridge, which offers a bigger yield for greater periodic returns from the dividend every quarter.