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Better Buy: Kinder Morgan Canada Ltd vs. TransCanada Corporation

By Reuben Gregg Brewer - Sep 26, 2018 at 9:18AM

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Kinder Morgan Canada is about to pay a big dividend, but you'll be better off with TransCanada Corporation right now, and here's why.

Kinder Morgan is a prominent name in the midstream space, so it's easy to see why investors would be interested in Kinder Morgan Canada Ltd ( KMLGF ). That's especially true after a recent timely move to get out from under a troubled pipeline project. However, there's a wrinkle in this the story because of the Canadian company's relationship with U.S.-based Kinder Morgan, Inc. ( KMI 0.06% ). Here's why most investors would be better off with TransCanada Corporation ( TRP -1.23% ) today.

Nice decision, now what?

Kinder Morgan Canada recently sold the Canadian government a troubled growth project for roughly $3.4 billion in cash. The expansion of the Trans Mountain Pipeline had been experiencing significant pushback from local governments, as well as Canadian citizens, and it looked unlikely to proceed. It was both a timely decision and a prescient one, since the project now looks like it's dead in its tracks.

A man turning valves on a pipeline

Image source: Getty Images.

This move is a mixed blessing, though. Kinder Morgan Canada no longer has that project to rely on for growth, but it has a lot of cash that it could put to other uses, like investing in different projects. There's only one complication: U.S.-based Kinder Morgan, Inc. is the parent of Kinder Morgan Canada, holding a roughly 70% stake. And there's a lot of opportunity in the United States for investment, with pipeline constraints holding back key onshore drilling regions and limiting supply to key consumption markets, like power companies in the Northeast. Kinder Morgan, Inc. would like to get that cash so it can use it in the States.

There are a number of different alternatives for Kinder Morgan, Inc., here, but it has chosen to pay down Kinder Morgan Canada's debt and pay a large special dividend. That's not a great outcome for new Kinder Morgan Canada investors, who would basically be buying a large dividend, but it does allow Kinder Morgan Inc. to get access to the cash. Perhaps more important, these moves materially alter the future outlook for Kinder Morgan Canada. In fact, following the distribution, Kinder Morgan Canada intends to review its business so it can provide new guidance for 2019 and beyond.   

After all is said and done, Kinder Morgan Canada will be financially strong. But after using most of its cash to reduce debt and pay a special dividend, it's hard to tell what the future holds. Most investors should stay on the sidelines until there's more clarity here.

A better option today

All of this is why TransCanada is a better option. This Canadian energy company has a large and diversified portfolio of assets that spans North America, with a material position in the midstream space.

In fact, the TransCanada name may be familiar to you because of the Keystone XL pipeline project, which was held up by the U.S. government a couple of years ago. However, under the current president, that project has received the green light to proceed, albeit with some alterations to the original plan. So, that very public negative isn't quite as negative as it once was.

However, there's more to like here than just this bit of news. For example, TransCanada has roughly $22 billion in near-term growth projects lined up through at least 2021. Management expects these projects to drive 10% annual EBITDA growth through 2020 and 8% to 10% dividend growth through 2021. That dividend, meanwhile, is backed by regulated or fee-based assets that account for about 95% of EBITDA. This is a very stable business.   

TRP Chart

TRP data by YCharts.

The shares, meanwhile, are down 15% from the highs reached in early January despite the strong outlook for business and dividend growth. The price drop has pushed the yield up to roughly 5%, notably more than the 3.9% Kinder Morgan Canada is offering today (not including any special payouts). And TransCanada's higher yield doesn't come with any of the baggage now creating uncertainty for Kinder Morgan Canada's future.

Not worth gambling

With Kinder Morgan Canada's business in a state of flux today, it's just not worth the uncertainty for most investors. It should come out of this period in a strong financial position, but there's no way to tell what its growth prospects will be. TransCanada, on the other hand, has a very clear path forward and a 5% yield backed by a fee-based business -- with plans for dividend growth as high as 10% a year for the next few years. It's a much better choice right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
KMI
$16.24 (0.06%) $0.01
TC Energy Corporation Stock Quote
TC Energy Corporation
TRP
$46.57 (-1.23%) $0.58
Kinder Morgan Canada Limited Stock Quote
Kinder Morgan Canada Limited
KMLGF

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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