While their businesses require huge upfront investments, they’re not that costly to maintain. Once laid, a pipeline just sits there, delivering oil to customers. Maintenance costs are only a small fraction of revenues; the rest can be paid out to shareholders.
Better yet, their cash flows (and by extension their dividends) are as steady as bond coupons. Pipeline companies simply earn a fee on every barrel of oil that flows through their networks. That means businesses like Enbridge and TransCanada are almost immune to things like wars, financial crises, or wild swings in energy prices.
But before you call up your broker to buy one of these stocks, there are also some key differences that investors need to consider. Let’s see how the two firms stack up on a range of measures.
1. Dividend yield: Yield is the most important metric to income investors. Heck, sometimes this is the only number people check. TransCanada yields 3.3%, which is just a tad better than Enbridge’s 3.0% payout. So, if you need current income, then TransCanada is your best bet. Winner: TransCanada
2. Dividend history: Of course, we have to dig a little deeper than a company’s current payout to judge quality. Enbridge has one of the most dependable dividends in Canada, never once cutting its payout since 1953. TransCanada has a long history of rewarding shareholders, too. However, the firm was forced to slash its dividend back in 1999 after a failed diversification initiative cost the company billions of dollars. Winner: Enbridge
3. Dividend growth: To offset inflation, growth in dividends is just as important as the current payout itself. TransCanada has increased its dividend at a 5% compounded annual clip over the past decade. That’s alright, but it’s not as good as Enbridge. The crosstown rival has raised its payout nearly three times faster, clocking in at about 14% annually over the same period. Winner: Enbridge
4. Earnings growth: Of course, future dividend hikes depend on a growing stream of profits. Based on analyst estimates compiled by Reuters, TransCanada’s earnings per share are projected to grow at a 10% compounded annual rate over the next five years. As impressive as that is, Enbridge is expected to grow earnings at an even faster 13% clip per year. Winner: Enbridge
5. DRIP program: I love dividend reinvestment plans, or DRIPs. These programs allow investors to use their dividend income to automatically buy more shares. In the case of Enbridge, you can buy your extra shares at a 2% discount to the market price. TransCanada once offered an even more generous discount, but the company has since discontinued the program. Winner: Enbridge
6. Valuation: Enbridge has been one of the hottest securities on the Toronto Stock Exchange, up more than 70% over the past five years. But as a consequence, the stock now trades at a rich 27 times forward earnings. That could leave shares vulnerable to a selloff if results disappoint. TransCanada, in contrast, is valued at a much more reasonable 21 times next year’s earnings. Winner: TransCanada
And the results are in…
Both Enbridge and TransCanada are top pipeline operators. Both crank out reliable dividends. Both will likely reward shareholders for decades to come. This is why I have recommended both in the past here at the Motley Fool Canada.
That said, Enbridge’s faster growth, longer dividend history, and generous DRIP program gives it the slight edge in my books.