Better Buy in February 2024: Constellation Software Stock vs. Enbridge Stock

Constellation Software (TSX:CSU) and Enbridge (TSX:ENB) represent two completely different investing approaches. Which is better?

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Constellation Software (TSX:CSU) and Enbridge (TSX:ENB) couldn’t be more different. One is a software serial acquirer that pays a paltry amount of dividends; the other is a pipeline that you buy expecting a dividend and nothing else. The companies and the investment theses behind these shares are diametrically opposed, which is why comparing them makes a lot of sense.

Because Enbridge and CSU represent such different industries, they also stand in for different investing styles (dividend/value investing in ENB’s case and growth investing in CSU’s case). In this article, I will compare Enbridge and Constellation side by side so you can decide which stock (and which investing style) is better suited to your portfolio.

Value

Enbridge scores a lot better than Constellation on traditional “value” metrics. It has lower price-to-earnings (P/E), price-to-sales, price-to-book and price-to-cash flow ratios than Constellation Software does. As a result of its comparatively cheap valuation, Enbridge has a fairly high dividend yield: 7.77%.

When companies have low P/E ratios, their dividend yields are typically higher than those of companies with high P/E ratios because dividends come from earnings. Constellation Software stock has just a 0.15% dividend yield, which is consistent with its rich valuation compared to Enbridge.

Another factor is dividend policy. Constellation pays out a mere 10% of its earnings as dividends, while Enbridge pays out a whopping 127%. This also contributes to Enbridge’s comparatively higher yield than Constellation, but it does put the dividend at risk.

Growth

When it comes to growth, there’s no question: Constellation Software has got Enbridge beaten.

In the last 12 months, CSU has grown its revenue, earnings and free cash flow at the following rates:

  • Revenue: 28%
  • Earnings per share (EPS): 8%
  • Free cash flow: 48%

For comparison, Enbridge grew at the following rates in the trailing 12-month period:

  • Revenue: -18%
  • EPS: 122%
  • Free cash flow: 37%

Enbridge does score a win on EPS growth, but Constellation wins in more categories. Also, when you pull out to a 10-year timeframe, Constellation shows vastly better growth than Enbridge, as the table below shows:

Enbridge – 10-year compounded growth rates

Revenue: 2.86%.
Earnings: 17.8%.
Free cash flow: N/A
Enbridge – 10 year compounded growth rates

Revenue: 2.86%.
Earnings: 17.8%.
Free cash flow: N/A
Constellation vs. Enbridge: Growth

The table above makes clear that Constellation has far better long term growth than Enbridge does. Having looked at the value and growth factors, we can now turn to the most important factor of all: management skill.

Management skill

When it comes to management skill, it appears that Constellation Software has an edge over Enbridge. CSU’s chief executive officer, Mark Leonard, has one of the best capital-allocation track records of all time and a great reputation on Wall Street and Bay Street. Enbridge’s executives are not nearly as well known and have questionable policies, such as raising dividends in periods when revenue is declining. On the whole, I would give Constellation the edge in management skills.

Foolish takeaway

Taking everything into account, Constellation Software appears to be a better buy than Enbridge. It’s a little more expensive, but it has better leadership and a much more sustainable dividend. I’d expect its stock to keep outperforming Enbridge’s.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Software and Enbridge. The Motley Fool has a disclosure policy.

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