The past year has not been particularly good to Kinder Morgan, Inc. (KMI 1.31%) and Enterprise Products Partners L.P. (EPD 1.07%) investors, with the former down over 20%, and the latter off by around 5%. However, both have reliable fee-based operations underlying their businesses and should continue to perform well on a fundamental level. That said, Kinder's deeper drop has made the pipeline company a lot more interesting as an investment, but there are still two good reasons to buy Enterprise over Kinder today.
Kinder Morgan had big growth plans when oil prices started to plunge in mid-2014. As one of the largest midstream companies in the United States, its business is heavily backed by fees, meaning the price of oil is less important than demand for the pipes and other facilities that get the fuel from where it is drilled to where it is consumed. However, that didn't matter to the financial markets, and Kinder's access to capital was constrained.
Management had to make a decision between investing in the business and continuing to pay a growing dividend. The company chose growth and cut the dividend 75% in 2016. That decision was partly driven by Kinder's relatively aggressive use of leverage. The giant midstream company has now gotten back to dividend growth, and it's started to reduce leverage, as well. However, it is still more leveraged than many of its peers, including Enterprise Products Partners.
For example, Kinder's debt to EBITDA ratio is around 6.5 compared to Enterprise's 4.7. Enterprise, for its part, has increased its distribution for 21 consecutive years. That included right through the downturn that forced Kinder into a dividend cut. I have trust issues with Kinder's decision because just a couple of months before it cut the dividend, it was still talking about dividend increases. However, even if you can get past that fact, Kinder's leverage, one of the main reasons for the cut, is still higher than Enterprise's leverage. I'd rather go with the more conservative company here. My fear is that the underlying issue that led to the dividend cut, debt, is still a concern at Kinder.
Kinder's dividend growth plans are pretty enticing. Management is calling for the dividend to go from $0.50 per share per year in 2017 to $1.25 in 2020. That's a huge increase in a very short period of time. At the same time, Enterprise just announced plans to slow its dividend growth to the low single digits. On the surface, that's a little disheartening. But there's more to understand, here.
Kinder's large hikes are simply the company getting back to its historical payment levels after a massive disbursement cut. Enterprise's decision to slow its distribution growth, meanwhile, is driven by a decision to self-fund more of its growth. That will reduce the number of dilutive units it sells to fund its growth plans over time, a clear positive for investors. That's very different from Kinder's dividend-cut decision and its plan for dividend hikes.
But here's the interesting thing: Enterprise currently yields around 6.3%. Kinder yields 2.9%. If you use today's stock price and the $1.25 dividend projection for 2020, Kinder's yield would be 7.1%. Yes, in a couple of years, the income from Kinder will be higher than what you'd get from Enterprise today, but you'll miss out on two years worth of distributions. And you will still be taking on the extra leverage risk all along the way. I don't think that's worth it, noting the very different distribution histories of these two midstream players.
Err on the side of caution
If all you care about is dividend growth, then Kinder Morgan is a great option today. However, when you consider the bigger picture, including the company's dividend history and leverage, taking a more conservative approach suddenly sounds a lot more compelling. Enterprise Products Partners' distribution growth slowdown isn't great, but it's for the long-term good. And its higher yield today and lower leverage easily give it the edge over Kinder Morgan in my book.