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Better Buy: Kinder Morgan, Inc. vs. Enterprise Products Partners L.P.

By Reuben Gregg Brewer – Updated Sep 17, 2018 at 8:49AM

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Pitting two of the largest midstream players in North America against each other reveals some interesting facts

If you are looking to invest in the midstream energy space, then industry giants Kinder Morgan, Inc. (KMI 0.98%) and Enterprise Products Partners L.P. (EPD 0.65%) will likely pop on to your list. Both are well-run companies, but they have a few key differences that are worth understanding before you make a choice between the two. Here's a quick primer on what you should be focusing on if you are trying to decide between this pair.

1. Big distributions getting bigger

Getting right to the point, most investors gravitate to the midstream space for the yield. Enterprise has the larger yield today at just under 6%. Kinder Morgan's yield is 4.5%. But don't stop there because these two are doing very different things with their distributions today.

Kinder Morgan is on a path to increase its distribution to $1.25 per share a year in 2020, up from just $0.50 in 2017. It has already taken the first step, hiking the dividend a huge 60% earlier this year. Using today's stock price, the yield will be roughly 7% after the midstream company gets done with its scheduled increases.   

A man turning valves on a pipeline

Image source: Getty Images.

Enterprise, on the other hand, is purposefully slowing down its distribution growth to the low single digits for a little while. The goal is to free up cash so it can self-fund more of its own capital investments. This will allow it to avoid issuing dilutive units to pay for expansion. That's a net positive, but a very different distribution path than the one Kinder is going down today. Note, too, that historical distribution growth was only in the mid-single digits, so Enterprise will never excite you on the distribution front, but that's not the goal. Enterprise is basically a slow-and-steady tortoise that just keeps going and going.     

2. History wasn't kind to one of these companies

Before you jump at Kinder Morgan and its huge dividend growth plans, you should take a quick look backward. Enterprise has increased its distribution for 21 consecutive years. Kinder Morgan cut its dividend in 2016. In fact, the $1.25-per-share-per-year dividend goal still won't return the dividend to its pre-cut level. Complicating this issue is the fact that Kinder's leadership was projecting a dividend increase of as much as 10% just a month or so before it decided to cut the dividend. In other words, Enterprise seems a little more trustworthy when it comes to distributions than Kinder Morgan.   

3. A little balance is needed

Kinder's cut is really a symptom of another issue: leverage. Enterprise is one of the more conservative midstream players, with a longtime focus on maintaining a strong distribution. For example, over the past few years the partnership has recorded distribution coverage of at least 1.2 times. That's a solid figure. As it goes through its transition toward self-funding, meanwhile, the coverage has increased to 1.5 times. The distribution is very secure. In the meantime, leverage is reasonable with debt to EBITDA at roughly 4.3 times.   

KMI Financial Debt to EBITDA (TTM) Chart

KMI Financial Debt to EBITDA (TTM) data by YCharts.

Kinder Morgan's dividend cut, though, was the result of the company's more aggressive use of leverage. When times were tough in the midstream space a few years ago and issuing shares wasn't a desirable way to raise cash, management had to make a choice between the dividend or investing in growth projects. It chose investing in growth projects. That said, its debt-to-EBITDA ratio is still much higher than that of Enterprise, at around 6.8 times. So leverage is just part of the plan at Kinder -- a fact you'll want to keep in mind if you decide to buy it.

4. What are they?

Another key factor that you'll want to understand is that Enterprise is a limited partnership and Kinder Morgan is a corporation. That has material implications for investors because limited partnerships come with unique tax considerations. For example, a portion of the distribution will be shielded from current taxation because it is a pass-through entity, allowing you to directly benefit from things like depreciation expenses. However, you are considered a part owner of the partnership and get a Schedule K-1 form every year showing your share of its financial results that must be included with your taxes. If that sounds complicated, well, it really can be. It's highly advisable that you consult a tax advisor if you own partnerships.

Kinder Morgan is just like any other company. There are no additional complications involved in owning it. If the goal is simplicity, you will clearly favor Kinder Morgan.

5. Growth opportunities

Both Kinder and Enterprise are giants in the midstream space and have huge opportunity to fill a glaring need to develop new midstream assets. For example, new pipelines are needed to handle the growing supply of oil and natural gas produced in the United States. New facilities will be needed to process and store that supply, too. And as the U.S. becomes an even larger exporter of energy products, there will be a need for more ports to handle the exports. Both of these midstream players will play a key role in meeting all of this climbing demand, a fact highlighted by the huge investments taking place at each of these midstream giants. Enterprise has roughly $5.7 billion worth of projects under construction right now. Kinder Morgan, meanwhile, has slightly more at roughly $6 billion worth of projects under way.       

What to do?

When you step back and look at the big picture, there are things to like about Kinder and Enterprise as well as issues that should make you stop and think. That said, the dividend cut and aggressive use of leverage at Kinder Morgan create a concern about trust -- will management live up to its word when it comes to dividends? If times get tough again and management has to make a choice between dividends and capital spending, history suggests income investors will get the short end of the stick. Although Enterprise's partnership structure comes with tax implications, it has never let investors down on the distribution front. It is also currently working to make its business even safer, though you'll have to sit through a year or so of slow distribution growth. That's not ideal, but I would err on the side of caution here and go with Enterprise.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

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