Investors looking at the midstream sector are often in search of income. If you're among that group, yield is a key metric for you, and you might be intrigued by Buckeye Partners' (NYSE: BPL) hefty 9.3% distribution yield, which is over 3 percentage points higher than the 6.2% on offer from Enterprise Products Partners (NYSE: EPD). But that one metric doesn't reflect the entire picture of either of these master limited partnerships. Here's a deeper dive to help you figure out if Buckeye is better than Enterprise.
1. Size and scale
Buckeye Partners' market cap is around $5 billion -- that's a fairly sizable business. However, Buckeye is just a pipsqueak in comparison with Enterprise, which has a market cap of roughly $60 billion. And the difference in size doesn't stop there. Enterprise is one of the largest and most diversified midstream players in North America. Its portfolio of pipelines, storage, processing, and shipping assets crisscross the continent. There are only a few companies that can match its scale and reach.
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Buckeye is not only smaller, but it has a less diverse portfolio. Historically it has been focused on storage assets, including in the Caribbean. While that gives the partnership a little international flare, its portfolio still doesn't hold a candle to the breadth and depth of Enterprise's assets. More recently, Buckeye has been looking to expand its domestic pipeline assets. But, as you would expect, the effort is tiny compared to Enterprise's scope. When it comes to size and scale, Enterprise is the easy winner.
2. Distribution history
Enterprise has increased its distribution for 21 consecutive years. Within that already impressive streak is a quarterly record of 58 consecutive hikes. Meanwhile, Buckeye Partners cut its distribution 40% in the final quarter of 2018. Clearly, Enterprise wins again.
But there's another issue at play: Even after a 40% distribution cut, Buckeye's units still yield over 9%. This is in part because investors appear to have soured on the entire midstream space. Enterprise's yield was as low as 4% as recently as 2015. However, when a yield gets up toward 10%, the market is usually highlighting that something is risky. So Buckeye's distribution cut is worrying, but so is the fact that, even after a big cut, it still offers an eye-catching yield.
This naturally leads into a discussion of Buckeye's management team's ability to invest on behalf of its unitholders. Although it had a long history of doing that well, the recent capital allocation story isn't pretty. In early 2017, the partnership bought a 50% stake in international storage provider VTTI for roughly $1.15 billion. The deal was funded with a mixture of dilutive unit sales and debt. The added leverage, coupled with the loss of a sizable customer in its Caribbean operations, turned out to be a significant headwind -- the very reason that led to the distribution cut.
Worse, along with the cut, Buckeye also announced that it was selling its VTTI stake, essentially admitting that it made a major misstep, and investors would have to shoulder the consequences. The final sale price was $975 million. You don't need a degree in math to see that this investment was a bad one. Buckeye, although starting to show some progress, is still working its way out from under the mess left behind as it tries to fund its shift toward pipelines. Yes, this could get the partnership back on the growth track, but there's a long way to go before it rebuilds the trust it lost.
Since its initial public offering in 1998, Enterprise has completed $26 billion worth of acquisitions. It has also managed to invest $38 billion in organic growth projects. And through more than $60 billion in investments, it has yet to skip a beat. Sure, some investments have worked out better than others, but none of them has left it so financially constrained that it was forced to cut the distribution. Once again, Buckeye loses.
No point in continuing this matchup
In schoolyard basketball games, at least while I was growing up, there was something called "the Jordan rule," named after basketball legend Michael Jordan, who dominated the NBA his entire career. Essentially, when one team is so much better than the other that it quickly becomes clear that the matchup is unfair, you just stop playing.
It took only three points of comparison to show that Buckeye can't possibly match up to Enterprise -- stop playing; Enterprise wins. Yes, its yield is more modest, but yield alone doesn't make an investment good. Enterprise is larger and more diversified, has a better track record of rewarding investors, and has done a more impressive job of putting unitholder capital to work to grow its business. Thus, for most, if not all, investors, Enterprise and its 6.2% yield is the better buy.
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