Better Buy: Brookfield Infrastructure Partners LP vs. Kinder Morgan Inc.

Infrastructure companies can be a great option for income-seeking investors. These entities typically generate robust cash flow backed by fee-based contracts, which gives them money to send back to investors. That's certainly the case with Kinder Morgan (KMI 2.14%) and Brookfield Infrastructure Partners (BIP 2.23%), which currently yield 2.6% and 4%, respectively, well above the S&P 500's 1.9% average.

While income seekers might take one look at those yields and declare Brookfield Infrastructure Partners the better buy, there are a few other things worth considering. One of those items, in my opinion, profoundly tilts the scale toward Kinder Morgan.

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A look under the hood

One of the most important factors for income-focused investors to consider is the underlying financials of a company. Here's how these two compare:

Data source: Kinder Morgan and Brookfield Infrastructure Partners. EBITDA = earnings before interest, taxes, depreciation, and amortization.

As that chart shows, Brookfield Infrastructure Partners currently has a stronger balance sheet. The global infrastructure operator has a higher credit rating that it backs with a lower leverage ratio. Furthermore, a larger percentage of its cash flow comes from stable sources like fee-based contracts. Because of its better financial position, Brookfield has increased access to the capital markets to finance its growth initiatives.

That said, one metric that stands out above the rest is that Brookfield Infrastructure distributes a greater percentage of its cash flow to investors, which is the primary reason it has a higher yield. For comparison's sake, if Kinder Morgan's payout rate were at the midpoint of Brookfield's target range, then it would yield a much more appealing 6.6% at its current stock price. That's worth noting because increasing the payout percentage is on the docket for Kinder Morgan and is the driving factor behind its much higher dividend growth forecast. That projection puts the company on pace to increase its yield up to 6.4% by 2020. Furthermore, given the company's current expansion project backlog, it expects to achieve that dividend while paying out less than 50% of its cash flow.

The X factor

The reason Kinder Morgan could yield well over 6% if it matched Brookfield's current payout rate is that its stock trades at a much lower valuation. At its recent price of around $19.50 per share, Kinder Morgan trades at less than 10 times distributable cash flow. Brookfield Infrastructure Partners, on the other hand, currently trades at more than 14 times its current annualized funds from operations. To put that valuation gap into perspective, if Kinder Morgan traded at that same multiple, its stock would be nearly 45% higher.

It's also worth pointing out that this isn't an apples-to-oranges comparison. While it's true that Kinder Morgan and Brookfield Infrastructure aren't directly comparable, they're still very similar. In Kinder Morgan's case, it's focused on operating energy-related infrastructure in North America, while Brookfield is a global infrastructure company that owns energy-related assets -- including a pipeline joint venture with Kinder Morgan -- as well as transportation, communication, and utility-type assets. That diversification does matter because it gives Brookfield more opportunities to expand. Meanwhile, its stronger balance sheet and higher current yield are certainly worth a premium.

However, while Brookfield should trade for a higher valuation than Kinder Morgan, its also worth pointing out that energy infrastructure companies typically trade for a midteens multiple of cash flow, which is currently the case with several rivals. In fact, at its peak in 2015, Kinder Morgan sold for nearly 20 times cash flow. In other words, it's easy to justify the case that Kinder Morgan is too cheap.

A lower yield now for a higher return later

While I love Brookfield Infrastructure Partners and believe it can deliver a low double-digit total return in the years ahead, I'd still choose Kinder Morgan over it right now. That's because I think investors can earn an even higher total return as Kinder Morgan achieves its dividend growth goals. Doing so would boost its yield, which should eventually push its valuation closer to the peer-group average. Those two factors could enable Kinder Morgan to deliver as much as double the total return of Brookfield over the next few years.