Investing is about the future, but you can't forget the past when you're looking at a company -- especially when you are a dividend stock investor. Kinder Morgan Inc (KMI 2.53%) is the perfect example of a company with a bright future and a tainted dividend history that should lead most to avoid it. Especially since there are great income alternatives such as Enterprise Products Partners L.P. (EPD 0.18%) and Holly Energy Partners, L.P. (HEP).
The problem with Kinder
Motley Fool's Matthew DiLallo recently explained all of the reasons why investors should like Kinder Morgan's future. The list includes improving leverage metrics, a largely fee-based business, and a nearly $12 billion backlog of growth projects. In fact, based on management comments, industry watchers believe the current annual dividend could as much as double in 2018! That would pull the yield from around 2.5% to 5%, based on the current share price.
Image source: Getty Images.
The problem is that I don't trust Kinder Morgan when it comes to dividends. In late October 2015, the company announced that "... we currently expect to increase our declared dividend for 2016 by 6 to 10 percent over the 2015 declared dividend of $2.00 per share." A few days later, it increased the quarterly dividend by a penny, noting that a key corporate goal was to "continue to return cash to our shareholders in increasing amounts."
But in early December of the same year, Kinder announced a 75% dividend cut. The reason was that the company needed to fund the growth projects it had earlier said it could afford while still managing to "return cash to our shareholders in increasing amounts." Thus, at this point, it's hard to believe that dividends are really a high priority at Kinder Morgan.
Better numbers
Which is why investors should be looking at Enterprise Products Partners and Holly Energy, both of which have increased their distributions each and every quarter for 50 or more consecutive quarters. While Kinder was scrounging for money, ultimately choosing to break its own word on the dividend to get it, Enterprise and Holly Energy continued to return cash to their unitholders in increasing amounts. But that's not the only reason to like this pair.
Enterprise currently offers investors a 6% distribution yield backed by a largely fee-based business, with a portfolio that is just as large and diverse as Kinder Morgan's, if not more so. It also has $8.6 billion worth of growth projects that should come on line between now and 2019 that will support continued distribution growth. And its balance sheet is in decent shape, with long-term debt making up around half the capital structure.
Enterprise's growth plans. Image source: Enterprise Products Partners investor presentation.
Basically, the story at Enterprise is pretty similar to Kinder's business-wise. The big difference is that Enterprise's tale includes continued slow and steady distribution growth and no distribution cuts.
Riskier fare
But let's assume you don't mind taking on the added risk of Kinder's spotty dividend history. In that case, I'd suggest a look at Holly Energy, which offers a robust 7.4% (or so) yield. That will be a full 2 percentage points above what Kinder would offer if it indeed increases its dividend in 2018.
As in the case of Kinder and Enterprise, Holly's business is fee-based (it's actually 100% fee-based), with more than 80% of revenue tied to long-term contracts. That said, it's a smaller company, focusing mostly on pipelines, storage, and terminals -- so you would be giving up some diversification. The most concerning fact, however, is that long-term debt makes up around 70% of the capital structure. That helps explain the relatively high yield.
HEP Financial Debt to EBITDA (TTM) data by YCharts.
Holly, however, has been in a similar situation before. It has a history of adding debt to buy assets from its general partner HollyFrontier or unaffiliated companies. It then uses the cash flows from its fee-based businesses to bring its debt levels back down. There's clearly more risk today, but Holly Energy is comfortable with what it's doing -- and 50 consecutive dividend hikes prove that the model works well for the company and its unitholders.
Go with the green
For dividend-minded investors, the prospect of a huge dividend increase at Kinder Morgan is pretty enticing. But you should consider the company's past lack of commitment to its own statements regarding the payout. If you are looking at Kinder, you are better off switching gears and looking at similarly situated Enterprise Products Partners or smaller, riskier, and higher-yielding Holly Energy Partners. This pair has proven they can grow and still reward unitholders along the way.
