Pipeline stocks haven't been kind to investors over the past few years. Complications resulting from the oil market downturn, as well as a host of other factors, have weighed on pipeline company valuations. That's clear from looking at two of the industry's giants, Enterprise Products Partners (NYSE:EPD) and Kinder Morgan (NYSE:KMI): They're down 16% and 62%, respectively, over the past three years. Because of their sell-offs, both companies offer dividend yields well above average -- 5% for Kinder Morgan and 6.1% for Enterprise Products Partners.

Those high-yielding payouts alone give investors a good head start on earning strong total returns in the years ahead. However, for those who only want to own one pipeline stock, a single factor makes Kinder Morgan stand out as the better buy right now.

Blocks spelling out Buy on a man's hand

Image source: Getty Images.

Drilling down into the numbers

The first step investors need to take when comparing two potential investments is to review their financial profiles. Here's how these two pipeline giants stack up:

Company

Credit Rating

Debt-to-Adjusted EBITDA Ratio

Projected 2018 Dividend Coverage Ratio

% of Cash Flow Fee-Based or Regulated

Kinder Morgan

BBB-/Baa3

5.1

2.6

91%

Enterprise Products Partners

BBB+/Baa1

4.1

1.3

90%+

Data sources: Kinder Morgan and Enterprise Products Partners. EBITDA = earnings before interest, taxes, depreciation, and amortization.

As that table shows, these companies have slightly different financial profiles. While both get more than 90% of their cash flow from predictable sources, Enterprise has the stronger balance sheet due to its higher credit rating and lower leverage. Kinder Morgan, on the other hand, has a much stronger dividend coverage ratio, though Enterprise is working to boost that number this year.

Overall, both companies have solid financial profiles. Kinder Morgan offsets its increased leverage by retaining more internally generated cash flow, which currently fully funds its expansion projects. Enterprise, on the other hand, is comfortable paying a higher dividend because it has the financial flexibility to use its stronger balance sheet to help fund growth.

A close-up of a gas pipeline under construction.

Image source: Getty Images.

One metric that sets Kinder Morgan apart

While Kinder Morgan and Enterprise Products Partners both have sound financials, there is one big difference between the two companies: valuation. As the following table shows, Kinder Morgan trades at a much cheaper value than Enterprise:

Company

Enterprise-Value-to-EBITDA Ratio

Price-to-Distributable-Cash-Flow Ratio

Kinder Morgan

10.1

7.8

Enterprise Products Partners

14.6

13.0

Peer group average

11.9

11.0

Data source: Kinder Morgan and Enterprise Products Partners.

In fact, Kinder Morgan's valuation is at the bottom of its peer group. There are two potential reasons. First, the company does have an above-average leverage ratio, which seems to be weighing on its valuation. However, it's worth noting that the company has significantly reduced leverage from the peak, and it's currently right around the company's target level.

The other issue that seems to be plaguing Kinder Morgan is the uncertainty surrounding its largest growth project, which is the $5.7 billion expansion of its Trans Mountain Pipeline in Canada. That project represents nearly half of the growth the company has in its backlog. However, Kinder Morgan does have another $6.3 billion of expansions beyond that one project, which is $1 billion more than Enterprise currently has under construction. That's worth pointing out since Enterprise is the larger company, which suggests Kinder Morgan has more visible growth coming down the pipeline even without Trans Mountain.

While investors could make a case that Kinder Morgan deserves a lower valuation than Enterprise Products Partners due to its higher leverage ratio and uncertain growth prospects, it's hard to justify the currently wide gap between the two companies.

A better value right now

Enterprise Products Partners and Kinder Morgan are both solid pipeline companies that offer investors dividend yields well above average. However, of the two, Kinder Morgan is the better one to buy right now since it trades at a much cheaper value. Because of that, it offers more upside potential, especially as it works through the issues currently holding it down.

Matthew DiLallo owns shares of Enterprise Products Partners and Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.