3 Reasons This MLP Might Make a Better Dividend Growth Investment Than Kinder Morgan

It's no secret that I'm a big fan of Kinder Morgan, Inc (KMI -0.05%). After it announced its $71 billion merger of its MLPs I called it one of the best dividend growth stocks in America and the perfect retirement stock. While I continue to hold that viewpoint, there are other great MLPs that I think deserve to be on your radar including Williams Partners (NYSE: WPZ). In fact, there are three reasons one could argue that Williams Partners makes a better long-term investment than Kinder Morgan.

Higher payout that's equally safe

Sources: Multpl.com, Yahoo Finance, conference calls, investor presentations

The first reason is that Williams Partners offers a far higher yield than Kinder Morgan. Currently, Kinder Morgan Energy Partners (NYSE: KMP) offers a comparable 6% yield, but once the merger is completed within the next few weeks, that higher yielding option will vanish. Normally, a higher yield indicates a slower expected growth rate or higher risk. However, thanks to the recent $6 billion acquisition of Access Midstream Partners (NYSE: ACMP) and a massive backlog of projects, Williams expects to generate a $1.1 billion excess of distributable cash flow through 2017. This is expected to result in a long-term average coverage ratio of 1.1. This is equal to Kinder Morgan's long-term coverage guidance and indicates that both Williams Partners and Kinder Morgan will be able to sustain and grow their respective distributions/dividends even during turbulent market and economic conditions. 

This brings me to the second reason Williams might make a better investment than Kinder Morgan: the size of each company's relative project backlog. 

Larger relative backlog 
Kinder Morgan's backlog of $35 billion is the largest in its industry, and should provide the company with many years of potentially double-digit dividend growth. However, Kinder Morgan is a $170 billion company, while Williams Companies (WMB 0.51%) is 50% smaller, at $113.5 billion enterprise value. Adjusting for the relative sizes of the two companies, we see Williams Partners' total backlog is actually 29% larger than Kinder Morgan.

Source: Williams Companies' third-quarter investor presentation.

Why does this matter? Because Williams Partners massive backlog could be a catalyst that helps it to maintain one of the fastest distribution growth rates in its industry for years to come. 

Long-term distribution growth potential
Kinder Morgan has offered dividend growth guidance through 2020 of 10% annually, while Williams Partners expects 10%-12% distribution growth through 2017. If Williams Partners is able to maintain that payout growth advantage over the long-term, then it might make a better income investment. With a larger relative project backlog, I think it's quite possible that Williams Partners will be able to sustain its payout growth rate advantage over Kinder Morgan for several more years. 

However, before investors potentially sell Kinder Morgan to buy Williams they need to understand that a qualitative difference exists between the two. 

Williams Partners has an execution problem
As I recently explained in an article covering the earnings of Williams Partners' general partner, Williams Companies,  Williams' management has an imperfect track record of completing projects on schedule. For example, the Access Midstream/Williams Partners merger was supposed to be complete by the end of the third quarter of 2014, but it's now scheduled for Q1 of 2015. Also, the restart of the expanded Geismar facility was initially set for April of 2014, then pushed back to June, and now expected in November.

Thus, before declaring Williams Partners a better long-term investment, investors should consider the trade-off between Williams' faster projected growth and Kinder's stability.  Kinder Morgan has an exceptional track record of meeting nearly all its projected goals without the kinds of execution problems Williams Partners has faced in the past. 

Why not own both?
While it's interesting to compare the relative growth prospects of Kinder Morgan and Williams Partners, the simple truth is both are great pipeline operators and likely to make exceptional dividend growth investments over the next decade or two. While Williams Partners has the potential for faster distribution growth, Kinder Morgan has one of the best management teams in the industry and has a remarkable track record of stable dividend growth through even the most turbulent economic conditions (such as the 2008-2009 financial crisis). In the end, I'd recommend income investors consider owning both Williams Partners and Kinder Morgan as great high-yield income investments profiting from America's historic energy boom.