Enbridge (TSX:ENB) and Pembina Pipeline (TSX:PPL) are two of Canada’s largest energy infrastructure stocks. Pipeline and infrastructure businesses can be attractive investments for income. Their infrastructure tends to be essential to their customers, and they tend to earn largely contracted streams of cash flow.
Both Enbridge and Pembina are quality bets for long-term income, but there are pros and cons to investing in one versus the other. Here’s a discussion why one stock might be better suited today.
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Enbridge stock is a behemoth but has interest rate risks
With a market cap of $98.5 billion, Enbridge stock is by far the larger and more diversified business. It is a huge entity that is diversified across liquids and gas pipelines, energy storage, utilities, LNG export facilities, renewable power, and alternative energy investments (like hydrogen).
Enbridge moves around 30% of the oil produced in North America. Likewise, it transports around 20% of the gas consumed in the United States. It operates the largest natural gas utility in North America. It has a significant renewable power business across Europe, the U.S., and Canada.
The point is, Enbridge is a colossal and crucial provider of energy infrastructure in North America. Over the past five years, it has delivered a decent 10% average annual total return. 61% of that return came from Enbridge’s substantial dividend payments. Today, Enbridge stock yields 7.33%. That is above its five-year average yield of 6.4%.
Enbridge has a great array of assets. However, it faces several risks. There has been a political move to shutdown some of its critical pipelines over environmental concerns.
In addition, Enbridge has a fairly high load of debt with a net debt-to-earnings before interest, tax, depreciation, and amortization (EBITDA) ratio of 6.4 times. Interest rates have significantly risen in the past year. As it goes to refinance its wide array of debt, there are concerns that earnings and dividend growth could get hit.
Given the increase of its yield in the past months, it appears the market is factoring this in. Today, Enbridge trades for 16.5 times earnings, which is below its five-year mean of 18.
Pembina has higher leverage to commodity prices, but has underperformed Enbridge stock
With a market cap of $22.5 billion, Pembina is significantly smaller than Enbridge, and its operations are much more niche. It operates a mix of collection and egress pipelines across Western Canada. It also owns several midstream and natural gas-processing facilities. Enbridge has a propane export terminal and is eyeing the development of an LNG terminal in British Columbia.
Pembina stock has underperformed Enbridge stock. Over the past five years, investors have only earned a 3.5% total average annual return. That return came entirely from dividends, as the stock is down 10% over the past five years. Today, this stock yields a 6.6% dividend yield.
Pembina is significantly more concentrated in Western Canada. Even though 85% of operations are contracted, when oil and gas prices are strong, you can expect this stock to do well. When they are weaker, the stock is likely to pullback.
Fortunately, Pembina has a fairly strong balance sheet. It has a net debt-to-EBITDA ratio of 3.8 times, which is nearly half that of Enbridge. Interest risk is considerably less with Pembina stock and its payout ratio is also lower. However, its returns have a closer link to commodity fluctuations. Pembina trades for 14 times earnings today, which is likewise a discount to Enbridge’s stock valuation.
The Foolish takeaway
Both stocks trade with attractive yields. If you have a view that oil and natural gas prices could recover in the coming years, Pembina is certainly the better bet. Enbridge stock is the play for a diversified, steady-as-it-goes business with an attractive dividend. However, investors will need to monitor earnings erosion if interest rates continue to remain elevated.
