Better Buy: Brookfield Infrastructure Partners L.P. vs. Kinder Morgan

Investors looking for income will find quality investment opportunities in large, fee-based businesses. Infrastructure-related industries are home to many companies with such business models as companies seek to generate predictable long-term cash flows as a reward for the massive up-front capital expenditures required to build and maintain assets such as cell towers, utility distribution networks, and energy pipelines.

Two above-average income stocks that generate fee-based business from infrastructure assets are Brookfield Infrastructure Partners L.P. (BIP -0.32%) and Kinder Morgan (KMI 2.48%), which offer shareholders distributions yielding 4.6% and 3.2%, respectively. (If the latter comes through on long-held plans to increase its per-share payout in 2018, then the current yield would jump to 5.3%.)

Both handily beat the yield of the S&P 500, but what if investors had to choose just one? Is the broader, global infrastructure portfolio of Brookfield Infrastructure Partners the better bet, or should investors put all their chips on booming North American energy production with Kinder Morgan?

Image source: Getty Images.

The matchup

While both companies own energy infrastructure assets, that's about where the similarities end. Brookfield Infrastructure is one of the worlds largest publicly traded owner of energy-distribution networks around the globe, in addition to cell network towers, toll roads, ports, and even timberland. It's one of the few pure-play infrastructure investments available to individual investors -- and it hasn't disappointed.

Shares of Brookfield Infrastructure have had no problem beating the S&P 500. In the last 10 years, the stock has more than doubled the total returns of the index, 289% to 132%. Proving the importance of returning cash flow to shareholders, over 115% of the returns in that span have come from the distribution alone. How does it do it? Growth in the last decade was driven by a steady stream of acquisitions in core areas and new markets. After gaining a foothold, additional smaller purchases and upgrades have slowly expanded its footprint over time.

For example, Brookfield Infrastructure recently invested $100 million gobbling up toll roads in India, which more than doubled the portfolio. It's also looking to expand its presence in the country's communications industries as well, by bidding on cell towers, an area in which it's already a leader in the United States. Management sees similar opportunities in ports, energy, water utilities, and renewable power industries worldwide.

Image source: Getty Images.

Meanwhile, the total returns of Kinder Morgan were holding their own against the S&P 500 up until 2015 when the management was forced to course correct. Energy prices collapsed, transport volumes dried up, creditors became wary of the pipeline operator's leverage ratios, and the company was forced to slash its distribution to clean up its balance sheet. Shares have dropped 60% in the last three years.

The good news for investors is that the hard part is over now. Kinder Morgan met its deleveraging goals (although it still boasts a higher leverage ratio than most peers) and, as transported volumes of oil and gas pick up across its continent-spanning network, is looking to distribute more of its cash flow to shareholders again. That includes boosting the distribution 60% in 2018 and repurchasing $2 billion worth of shares. 

North America's largest pipeline operator also has an impressive backlog of growth projects. The five-year backlog includes $12 billion worth of projects that are expected to contribute $1.6 billion in annual adjusted EBITDA at full tilt. However, it should be noted that Kinder Morgan recently announced it may pull the plug on the Trans Mountain Pipeline expansion project in Canada. That's significant because the project made up nearly half of the backlog budget and over half of the expected earnings growth from it. 

Image source: Getty Images.

By the numbers

Both Brookfield Infrastructure and Kinder Morgan offer above-average distribution yields, but that's not the only factor income investors consider. The ability to grow earnings, increase the distribution, and deliver total returns -- including share appreciation -- over time should not be overlooked. How do the two infrastructure stocks compare? As it turns out, pretty evenly in most metrics.  

Data source: Yahoo! Finance.

Kinder Morgan expects to increase its annual distribution from $0.50 per share to $0.80 per share in 2018, which would boost the current yield from 3.2% to 5.3%. That high yield is more likely to be an indication that Wall Street is still undervaluing the company despite its most recent annual report and its future earnings potential, rather than a reflection of the risk involved in the investment, as is often the case with higher yields. 

That would give the pipeline leader the edge in the matchup when it comes to yield, and an argument could be made that forward earnings and EV to EBITDA are a wash. That said, Brookfield Infrastructure offers a sweet combination of a high yield, growth opportunities, and a consistent track record of creating value for shareholders extending back over a decade. Consistency is an often-overlooked ingredient in success, but a quick look at the company's long-term trends makes its value clear.

For instance, Brookfield Infrastructure thinks it can increase funds from operations (FFO) up to 9% per year and drive its distribution 5% to 9% higher per year for the foreseeable future. An established asset base makes that possible, as incremental increases in fees over time boost cash flow generated from existing assets, which fuels further growth and expansion.

The better buy is...

Brookfield Infrastructure offers a more diversified investment than Kinder Morgan -- and consistent growth over long periods of time is its key differentiator. The global company boasts the ability to tap into emerging markets and piggyback on the expansion of the global economy. While Kinder Morgan has a bright future thanks to North America's rise up the ranks of energy-producing regions, such direct exposure to energy markets presents more risk to shareholders.

To be clear, I think both infrastructure stocks are buys, but Brookfield Infrastructure gets the edge for a nearly impeccable track record and higher degree of diversification, both in the industries it serves and geographies in which it operates. Besides, it's pretty difficult to beat 289% total returns in the last decade.