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Better Buy: Kinder Morgan vs. Enterprise Products Partners

By Reuben Gregg Brewer – Sep 21, 2019 at 5:05PM

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Which high-yield option is the better choice between these two bellwethers of the midstream industry?

If you are looking for a high-yield dividend stock, then the midstream oil and natural gas sector is a good place to start. This niche of the energy industry has been out of favor on Wall Street despite the need for more infrastructure to move the United States' increasing production from where it gets drilled to where it eventually gets used. And if you have looked at the industry, then high-yielding Kinder Morgan (KMI -0.92%) and Enterprise Products Partners (EPD) are names you have heard of. But which is the better option?

Similar in many ways

Both Enterprise Products Partners and Kinder Morgan are sizable midstream players. Enterprise's $63 billion market cap is about 30% larger than Kinder's $48 billion, which is a notable difference. However, they each rank among the largest energy stocks in North America and have a broad reach. Enterprise owns pipelines, processing facilities, storage, ports, and shipping assets. Kinder's list is virtually identical, with both companies getting paid largely for the use of their assets, not based on volatile energy prices. Basically, they stand toe to toe in the industry.

A man turning valves on a large steel pipeline.

Image source: Getty Images

In addition, both midstream players offer big yields today. Enterprise's distribution yield is roughly 6.1%, while Kinder's dividend yield is 4.9%. On the surface, Enterprise has a clear lead here, but Kinder Morgan has plans to increase its dividend by roughly 25% next year. That will jump up its yield to roughly 6.1%. In other words, investors have already priced in the planned dividend hike, and, once again, the two midstream giants appear to be roughly equal. 

And both of these midstream giants continue to invest for the future. Kinder has roughly $4.4 billion worth of projects in the works (with another billion or so on the drawing board), which should take it through 2023. Enterprise has around $6 billion in projects planned through 2020 and expects there to be plenty more where that came from as U.S. energy production continues to grow. The cash flow generated by the capital investments these two midstream giants are making should support long-term growth and regular increases in their distributions.

Some important differences

At this point, investors might be thinking that a coin toss would be enough to decide here. But that's not the case. For example, Kinder Morgan is structured as a regular company. No big deal there. However, Enterprise is a master limited partnership, a much more complex structure that comes with tax issues and generally doesn't play well with tax-advantaged retirement accounts. If you are looking to invest money from an IRA, then Kinder would be a better fit. And if you decide on Enterprise, you might want to consider talking to an accountant before dealing with the often-confusing K-1 statement you'll be getting before April 15 each year.

They also have vastly different distribution histories. Enterprise has increased its payment for 22 consecutive years. After years of annual increases, Kinder Morgan slashed its dividend by 75% in 2016. Recent dividend hikes have been large, but only because they are coming off of a low base. And the dollar payout remains well below the precut level. Perhaps even more important, Kinder Morgan was still telling investors to expect a dividend increase of as much as 10% just a couple of months before the 2016 cut. If you are looking for a reliable income stream, Enterprise is the better choice. 

Dividend growth investors, meanwhile, might see Kinder as the better option. But as noted above, the huge 25% increase planned for 2020 appears to already be priced into the stock. And what happens after that hike is up in the air. It's highly likely that dividend growth slows down, but to what level is unclear. That said, Enterprise's distribution is likely to expand at a low- to mid-single-digit pace over time, as it has in the past. That will keep the buying power of your distributions ahead of inflation, but it probably won't excite you. So there's really no clear winner here despite what at first glance would appear to be an easy win for Kinder Morgan.   

EPD Financial Debt to EBITDA (TTM) Chart

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

Then there's the issue of leverage. Kinder Morgan's aggressive use of debt was one of the reasons it ended up cutting its dividend. Management has since strengthened the balance sheet, but leverage remains elevated compared to Enterprise. This trend isn't likely to change, with Kinder's improved financial position still notably weaker than Enterprise's when you look at debt-to-EBITDA ratios and how easily each covers their interest expenses. Conservative investors will likely sleep better at night owning Enterprise. 

Boring is beautiful

These two giants have similar yields, sizable growth plans, and big midstream businesses. The key is to look at the differences. The big ones for income investors will likely be Kinder's dividend cut (after telling shareholders to expect another increase) and more aggressive use of debt. Add up the similarities and differences here and most investors will likely be better off with Enterprise Products Partners. The one caveat is the added complexity of Enterprise being a limited partnership, but that may be worth the extra work if you like to sleep well at night.

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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