Kinder Morgan (NYSE:KMI) and Williams Companies (NYSE:WMB) are two of the largest natural gas pipeline operators in North America. Those systems provide these companies with predictable cash flow that they use to pay high-yielding dividends. Meanwhile, given the growth forecast of the North American natural gas market, both companies should have ample opportunity to expand their systems. That should provide them with even more money to increase their dividends.

While both companies should grow shareholder value in the coming years, most investors likely only want to hold one of them in their portfolio. Here's a closer look at which one is the better buy right now.

Pipelines heading to a refinery with the sun shining in the background.

Image source: Getty Images.

Drilling down into the financial profiles

The first step investors should take when analyzing two investment options is to look closely at their financial profiles. Here's how these two natural gas pipeline giants stack up against each other:

Company

Dividend Yield

Credit Rating

% of Cash Flow, Fee-Based or Regulated

Debt-to-Adjusted EBITDA

Dividend Payout Ratio

Kinder Morgan

4.8%

BBB/Baa2

91%

4.6 times

45%

Williams Companies

5.6%

BBB/Baa3

97%

4.5 times

59%

Data source: Kinder Morgan and Williams Companies.

As that table shows, these companies have similar financial profiles. The only noticeable difference between them is that Kinder Morgan pays out a smaller percentage of its cash flow in support of its dividend. That's the main reason it has a lower yield. The company is currently using that extra cash to finance expansion projects. However, it expects to increase its dividend by 25% next year, which will put its yield and payout ratio closer to Williams' level.

Aside from that, Williams Companies gets a slightly greater percentage of its cash flow from stable and predictable sources like fee-based contracts. Because of that, it has less volatility in its cash flow than Kinder Morgan, which has some direct exposure to oil prices due to its oil production business in Texas.

A look at their growth prospects

Kinder Morgan currently has $5.7 billion of growth projects under construction, $3.1 billion of which it will fund in 2019. Those projects have the company on track to grow its earnings by 3% this year, while cash flow per share should rise 4%. That improved profitability comes even though the company sold the Trans Mountain pipeline in Canada last year.

Meanwhile, Kinder Morgan anticipates that it can secure $2 billion to $3 billion of new projects per year for the foreseeable future. At the low end of its forecast, Kinder Morgan can grow earnings by about 4% per year. Driving that growth is North America's need for more natural gas infrastructure. According to one estimate, the industry will have to invest $23 billion per year through 2035 on new pipelines, processing plants, and LNG terminals.

Williams Companies is also benefiting from the need for more gas pipeline infrastructure. The company plans to invest between $2.4 billion and $2.8 billion on new expansion projects this year, which should help grow its earnings by 8%. Meanwhile, Williams is well positioned to continue growing over the next few years. In the company's view, it can secure enough new projects to expand earnings at a 5% to 7% annual pace after this year.

A quick peek at their valuations

Shares of Kinder Morgan have been on fire this year, surging by about 35% overall, so shares of the pipeline giant aren't as cheap as they were a few months ago. However, with the stock recently trading at $20.50 apiece and Kinder Morgan on track to haul in $2.20 per share in cash flow, it's selling for about 9.3 times cash flow. That's one of the cheaper valuations in its peer group.

Williams Companies has also been enjoying a good year, with shares recently up more than 22% to $27 apiece. The company, meanwhile, is on track to generate about $2.58 per share in cash flow. Given those levels, shares trade at 10.4 times cash flow, which is about the middle of the peer-group average.

Verdict: Kinder Morgan is a better buy right now

Because these two pipeline companies offer similarly sound financial profiles and good growth prospects, they should trade at around the same valuation multiple. Since that's not the case, Kinder Morgan stands out as the better buy right now. That's because its lower valuation sets it up to potentially produce higher total returns for investors in the coming years.