If you are examining the midstream oil and gas industry, then you've likely seen the names Kinder Morgan Inc. (KMI 0.88%) and Enterprise Products Partners L.P. (EPD 1.50%). They are two of the largest players in the sector, albeit with very different histories. A quick analysis of their pasts will tell you a lot about their outlook for the future, and which one is the better buy.
The problem with Kinder Morgan
In Kinder Morgan's most recent investor presentation, it included this statement on a slide labeled "Our Strategy": "Reduced dividend demonstrates our commitment to investment grade and our ability to fund growth projects without need to access capital markets." You read that right: Cutting the dividend 75% in early 2016 was a good thing.
Image source: Kinder Morgan Inc.
That's not how I see it. I see the dividend cut as an admission of management overreach, with too much debt and plans that were larger than could be afforded if everything didn't go just right. Well, the market didn't cooperate and plans didn't play out as expected and, when push came to shove, shareholders got hit -- hard.
That's not to suggest that Kinder Morgan is a bad company. It has a massive portfolio of assets across the United States, and it even reaches into Mexico and Canada. Roughly 90% of its cash flow is backed by toll-taker contracts not impacted by commodity prices (66% of cash flow is take or pay). And it has a $12 billion backlog of projects that it now believes it can fund out of cash flow while still paying its dividend.
Its much-reduced dividend, that is. If dividends don't matter to you, then Kinder Morgan is a stock you should look at very closely. However, I care a great deal about dividends. I believe they are, among other things, a statement about management's commitment to shareholders. If you believe that, too, then Kinder Morgan made a very important statement when it chose to make a massive dividend cut. Don't forget that management had professed a commitment to the dividend, including plans for an increase in 2016, just a few weeks before the cut was announced.
Enterprise's distribution held up when others didn't. Image source: Enterprise Products Partners L.P.
Another option: Enterprise Products Partners
To be fair, Kinder Morgan may have made the right choice for the company in cutting the dividend. But when you compare it to fellow midstream industry giant Enterprise Products Partners, you see there are better options for investors who like to keep getting their distributions in good times and bad.
Like Kinder Morgan, Enterprise has a sprawling network of midstream assets. A big piece of its business is backed by toll-taker contracts, and it has roughly $7 billion of projects set to come on line between now and 2019 that will help grow the business. But here's the real difference: Enterprise has increased its distribution every year for the last 20 years, including a hike in each of the last 50 quarters. When the markets got rough and Kinder Morgan cut its payout, Enterprise's commitment to its unitholders held firm.
That didn't happen by accident. Enterprise has a conservative management approach that gives it breathing room when things get tough. For example, it covered its distribution by 1.2 times in 2016, which is more than ample room to raise the distribution or protect it if there are problems in 2017. A great example of this is the graph below. When oil prices cratered (the red line), Enterprise's distributable cash flow didn't skip a beat (the green line).
When oil fell, Enterprise's distributable cash flow stayed strong. Image source: Enterprise Products Partners L.P.
I'll go with boring
What all this doesn't tell you is how fast each company can grow or how they will perform in the stock market. Now that Kinder Morgan has gotten itself into a better financial position, partly thanks to that 75% dividend cut, it might very well grow its top and bottom lines faster than Enterprise does. That, in turn, could lead investors to reward the company with a swiftly rising stock price.
Even if that were to happen, I would still rather own Enterprise. The truth is, it is likely to be very boring, with slow-and-steady distribution increases backed by slow-and-steady business growth. That's the kind of trend that lets dividend investors sleep well at night. Add in the hefty 6% distribution yield Enterprise offers today and you are getting paid very well to be bored. Leave all that dividend excitement to other investors.
