2 High Yield Blue Chips

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In case you haven’t noticed, the world is in turmoil right now. Inflation is climbing to its highest level in about four decades, the global economy is still plagued by appalling supply chain delays and other persistent headwinds from the COVID-19 pandemic, and Russia’s invasion of Ukraine left the world teetering on the brink of World War 3.

The markets are chaotic. Energy prices are soaring and Gold (GLD) and Bitcoin (BTC-USD) are making stronger moves higher. Meanwhile, US indices (SPY) continue to fall while European stocks are in the midst of a crash. Tech stocks (ARKK) also continue to have an epic ride.

Where is an investor to allocate capital today and still sleep well at night? Bonds are obviously not safe given that interest rates remain near historic lows and well below the rate of inflation. Additionally, with the Federal Reserve expected to raise interest rates significantly in the coming months, bonds are likely to lose value going forward. There remains a sector ideally positioned to invest that remains undervalued, offers reliable and growing incomes that are roughly at the same level as the current rate of inflation, and which is also inflation resistant: midstream infrastructure. Although the sector is not without risks from increased government regulation and the push towards renewable energy, the Russian invasion of Ukraine and soaring oil prices have allayed many of these concerns in a foreseeable future.

In this article, we’ll compare two high-quality, blue-chip mid-stocks to see which is the best buy right now.

Enterprise Product Partners (EPDs)

EPD has a well-diversified, blue-chip asset base that primarily manages fixed-fee contracts. As a result, it generates very stable and predictable cash flows to support distribution and reinvestment in the business at high rates of return.

It operates in several major production basins and has recently expanded its geographic reach and growth potential through its Navitas Midstream agreement. As a result, it delivers incredible value for customers, giving it a strong competitive advantage.

It also derives the majority of its earnings from natural gas and NGLs, while it also has significant exposure to crude oil, petrochemicals and refined products. This diversification allows it to benefit from greater cash flow stability and to seek out a greater variety of investment opportunities.

~80% of its clients are investment grade or equivalent and its balance sheet is industry leading with a BBB+ credit rating. It boasts one of the lowest leverage ratios in the industry at 3.1x TTM at the end of Q4 2021, which is particularly remarkable given the low-risk nature of its assets. Meanwhile, it has incredible financial flexibility thanks to its $7.3 billion in liquidity, substantial free cash flow and very long weighted average debt duration.

Going forward, its growth potential isn’t breathtaking, but there’s nothing to scoff at either. Growth capital spending is expected to increase from $1.8 billion in 2021 to $1.5 billion in 2022, but its acquisition of Navitas Midstream is expected to be highly accretive with a 14% DCF return on investment expected to from the deal and should also open up additional high yield prospects. , low-risk organic growth investment opportunities over time. Management is also investing in the growth of its scalable technology team, which should also generate growth opportunities in the future. Another underrated growth catalyst for the company is that 100% of its pipeline revenue is tied to inflation.

The most attractive aspect of EPD is its well-hedged distribution (1.7x DCF hedge) which yields over 7.3% and is expected to grow at an annualized rate of 3-5% for the foreseeable future as it unwinds. one step closer to becoming an aristocrat with 23 consecutive years of growth and cast count.

All this leads us to the conclusion that, despite the recent increase in its unit price, the EPD remains a high yield investment at an attractive price.

Its EV/EBITDA ratio is just 9.71x, which is a steep reduction from its historical average EV/EBITDA ratio of 12.66x and well below most of its quality industry peers investment. For example, the other two midstream companies rated BBB+ (Enbridge (ENB) and Magellan Midstream Partners (MMP)) have EV/EBITDA ratios of 13.03x and 11.15x, respectively, which makes the EPD ratio paltry in comparison.

The Williams Companies (WMB)

WMB has mission-critical natural gas infrastructure, as it handles approximately 30% of the United States’ natural gas through its assets. Additionally, its Transco pipeline is the largest and fastest growing pipeline in the country. Similar to EPD, its 98% fee-based revenue and minimal commodity price exposure give it a very stable cash flow profile.

Additionally, the fact that 86% of its revenue comes from investment grade clients and only 1% comes from high yield junk bond clients means that its cash flow profile is arguably even safer than that of ‘EPD.

The cash flow and dividend growth profiles are similar to EPD’s as it continues to pursue attractive organic growth plans and increase its dividend roughly in line with cash flow growth. Its growth profile includes 9 development projects and $4 billion allocated to transport natural gas to power generation facilities, 9 development projects and $4 billion allocated to transport natural gas to export facilities of LNG, and 12 projects and 3 billion dollars allocated to transport natural gas to industrial facilities. /LDC.

Also similar to EPD, WMB has a very strong balance sheet with a recent upgrade from Moody’s to Baa2 and a BBB credit rating from S&P. Meanwhile, its leverage continues to improve significantly, with its leverage ratio dropping from 4.35x at the end of 2020 to 3.9x at the end of 2021. While this is obviously not as good as the EPD, it is still quite sure, especially given how high-quality its cash flow is. On an AFFO basis, its dividend coverage ratio is now just over 2x, making it a very safe and attractive yield of 5.2%. Additionally, the company expects to continue its deleveraging through a combination of debt reduction and EBITDA growth.

On the valuation front, WMB looks expensive relative to its history with an EV/EBITDA ratio of 11.16x compared to its historical average of 10.28x. That said, compared to other premium C-Corp peers, it actually seems pretty reasonable. ENB has an EV/EBITDA ratio of 13.03x, Kinder Morgan (KMI) has an EV/EBITDA of 10.48x and ONEOK (OKE) has an EV/EBITDA of 12.07x.

Key takeaway for investors

As we learned during our recent exclusive interview with the company, EPD’s management is probably the most clear-headed in the industry. They have a long track record of generating above-average returns on invested capital and are approaching the prestigious 25-year mark of consecutive increases in distributions. Meanwhile, EPD units remain undervalued relative to the overall industry and EPD history and the yield is very high and well hedged and the balance sheet is significantly under-leveraged. Between runaway inflation, soaring energy prices, EPD’s recent acquisition of Navitas Midstream and other growth investments, growth is expected to remain strong for years to come. We are evaluating the units to Buy here.

Meanwhile, WMB also has a lot to offer investors here with an almost equally impressive asset base that provides almost utilitarian security for investors. The balance sheet is rock solid and the dividend is attractive, safe and growing. That said, its valuation isn’t particularly cheap at the moment, so it warrants a Hold. We would be interested in a step back, but there are currently other, more attractive places to invest in the in-between space.

Important Note: EPD issues a K1 tax form while WMB issues a 1099. Keep tax implications in mind before investing in either security.

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