Better Buy: Magellan Midstream Partners LP vs. Spectra Energy Partners

SEP Average Diluted Shares Outstanding (Quarterly) Chart

SEP Average Diluted Shares Outstanding (Quarterly) data by YCharts .

It should be no surprise, then, to see that maintaining a slow and steady growth while minimizing shareholder dilution has led to better overall returns over the past decade.

SEP Total Return Price data by YCharts .

So yeah, Magellan's current portfolio of growth projects looks modest compared to just about every other major midstream company out there today. But management has shown repeatedly that it can do more for each share with less investment. In my book, that makes Magellan a better buy almost any day of the week.

Matt DiLallo : An investment in Spectra Energy Partners is clearly a bet on its future growth. With $6 billion in projects under construction, this is a company that is investing heavily to capture new opportunities. That said, it is not pursuing growth for the sake of growth, but instead is taking a very prudent approach by focusing on demand-driven growth that is backed by solid fee-based contracts.

Roughly 80% of the projects in the company's backlog are demand-pull projects, which connect energy supplies to end-users. Nearly all of these projects are natural gas pipeline projects secured by long-term contracts with customers that have strong credit profiles. This approach mitigates much of the company's risk, enabling it to deliver sustainable distribution growth.

Spectra Energy Partners is also taking a very conservative approach to funding these projects. Like Magellan Midstream, Spectra retains more distributable cash flow than the average MLP. While most of the sector tries to maintain a 1.0 times distribution coverage ratio, Spectra projects its coverage ratio will average 1.2 times in each of the next three years. That provides it with some excess cash flow, which it reinvests into its growth projects. Furthermore, the company is backed by a solid credit profile, boasting an investment-grade credit rating and good credit metrics. Its debt-to-EBITDA ratio, for example, ended last year at 3.6 times, which was below its 4.0 times target and well below its maximum 5.0 times debt covenant ratio. That leaves it with plenty of borrowing capacity to fund its growth pipeline.

Spectra Energy Partners offers the best of both worlds. Not only does it have a visibly robust growth pipeline, but it is financing that growth in a very conservative manner. That gives it the edge in my book.

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Matt DiLallo has no position in any stocks mentioned. Tyler Crowe owns shares of Magellan Midstream Partners. The Motley Fool recommends Magellan Midstream Partners. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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