Can you really compare $300-million-market-cap Kinder Morgan Canada (KMLGF) to Enbridge (ENB -0.51%), a $70 billion midstream industry giant? The answer is yes, but you need to dig a little bit deeper to understand why. Here are four key points to consider when examining these two companies -- one of which is vital to understand before you make a decision.
1. The dividend
Investors considering the midstream sector are usually looking for dividend stocks. Kinder Morgan Canada's 4.3% yield is around twice as much as you'd get from an investment in an S&P 500 Index fund. However, it is still notably below the nearly 6% yield offered by Enbridge. So Enbridge is the clear winner if all you are considering is yield.
Image source: Getty Images.
However, there's always more to the dividend picture than just yield. For example, Kinder Morgan Canada has only been a public company since mid-2017 and has little dividend history to look at. Enbridge, meanwhile, has increased its dividend annually for 23 consecutive years. Enbridge has clearly proven that it places a high priority on rewarding shareholders with dividend growth over time. Kinder Morgan Canada hasn't had enough time to show much of anything on this front.
That said, Enbridge covered its dividend by roughly 1.2 times in 2018. That's ample coverage in the midstream space but not quite the whole story. The company has been working through a major overhaul, buying a number of controlled entities to simplify its business. The long-term target for the dividend is roughly 65% of distributable cash flow, which equates to a coverage ratio of around 1.5 times. That's very good in the midstream space. Coverage was around 1.8 times in the first quarter, but the target for the full year is 1.5 times based on current company projections.
After a big asset overhaul of its own, Kinder Morgan Canada is projecting roughly 1.4 times coverage for its dividend in 2019. That's also very good but still a little below what Enbridge is serving up. All things considered, Enbridge is the easy win on the dividend.
2. Leverage matters
Dividend safety, however, also requires a close look at a company's balance sheet. And in this pairing, Kinder Morgan Canada is in much better financial shape today. As noted above, it sold a large asset in 2018. Part of the cash was used to pay down debt, leaving the company's trailing debt-to-EBITDA ratio at a very low 0.3 times. Enbridge's makeover, on the other hand, required it to spend money. Its debt-to-EBITDA ratio ballooned to more than 12 times at one point but is now down around 5.5 times. That's a vast improvement and not out of line for the midstream space. However, it's still nowhere near as low as Kinder Morgan Canada's metrics here.
ENB Financial Debt-to-EBITDA (TTM) data by YCharts.
That makes a big difference, because it means that Kinder Morgan Canada has a lot more room on its balance sheet to support growth spending. It clearly needs to find solid projects and execute well, but investors shouldn't need to worry about whether it can support the spending plans it creates -- it can. Enbridge requires a little more monitoring on that front, even though there's no particular reason to worry.
3. What about those growth plans?
But here's the problem for Kinder Morgan Canada: After the big asset sale, it decided to review its business to figure out what steps to take next. Although that's a big decision, the only outcome is that it will remain a stand-alone company. After 2019, it really doesn't have any material growth plans. That means it's something of a blank slate, and investors have to hope it finds ways to grow in the future.
Enbridge, meanwhile, has a lot of plans in the works. The giant Canadian midstream company has 16 billion Canadian dollars worth of capital projects planned in 2019 and 2020, with the expectation that it can comfortably invest CA$5 to CA$6 billion annually thereafter. This spending is projected to lead to dividend growth of 10% in 2019 and 2020, with growth of 5% to 7% in the following years. Enbridge wins this one hands down for any investor who wants some clarity into the future.
4. Scale and diversification
The market caps of Kinder Morgan Canada and Enbridge are orders of magnitude different. There's a big reason for that: Kinder Morgan Canada owns just three assets. While that's not necessarily a knock against the company, it is an important factor to take into consideration. If something goes wrong at one of its businesses, it would be a big problem.
Enbridge, meanwhile, is one of the largest midstream companies in North America (80% of EBITDA). It has a few key assets that drive its business, but it has a much larger overall portfolio than Kinder Morgan Canada -- notably including more assets in which to invest for future growth. And Enbridge is also one of the largest gas utilities in North America (15% of EBITDA), providing even more stability to its top line. Enbridge wins again.
That said, you can't count Kinder Morgan Canada out, because U.S. midstream giant Kinder Morgan Inc. (KMI -0.67%) owns 70% of its shares. That's been a mixed blessing so far, since a large portion of the cash from the asset sale noted above was also used to pay out a massive dividend. That dividend was orchestrated by Kinder Morgan Inc. because it wanted to get its hands on the money. So there are very real questions about whether Kinder Morgan Canada will do what's best for Kinder Morgan, Inc. or for individual investors. But this relationship may also allow Kinder Morgan Canada to punch above its weight when it comes to finding growth-oriented investments.
Enbridge still wins, but Kinder Morgan Canada scores better than you might at first expect when you look at the bigger picture.
A bird in the hand
Investing is all about weighing options. When it comes to Enbridge and Kinder Morgan Canada, you are considering an industry giant with a long history and an upstart with the potential for years of growth ahead of it (likely supported by a close relationship with one of Enbridge's largest competitors). Kinder Morgan Canada's dividend yield is lower today, but once it starts investing for the future, dividend growth could be swift. More aggressive types might find that a worthwhile trade-off.
But most will probably be better off with Enbridge. This industry giant's capital investment and dividend growth plans are material and appear well laid out. And since it doesn't have any conflicts with an outside investor (specifically Kinder Morgan Inc.'s 70% stake in Kinder Morgan Canada), you know it's working on behalf of individual investors. Despite the higher leverage, most investors will be better off tilting in favor of higher-yielding and more-diversified Enbridge.
