If all you care about is a stock's dividend yield, then Kinder Morgan (KMI 1.87%) and its 5% yield is the easy winner over NextEra Energy Partners (NEP 1.27%) and its 3.9% yield. But you can't stop there if you want to make a good investment decision. Here are a few key issues to think about as you compare high-yielding Kinder Morgan to NextEra Energy Partners.
1. The core of the matter
Kinder Morgan owns and operates a collection of midstream energy assets. In fact, it owns one of the largest portfolios of midstream assets in North America, and is a bellwether name in the industry. Roughly 90% of its cash flow is fee-based, meaning it gets paid simply for the use of the assets it owns. The often volatile prices of oil and natural gas aren't a major factor, providing a fairly stable stream of cash to support the company's dividend. As long as the world needs these carbon fuels, Kinder Morgan's business should hold up fairly well.
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But that's the problem: Carbon fuels aren't exactly in favor today -- even if the world does still need them. That's why NextEra Energy Partners' portfolio of assets is so interesting. The master limited partnership, controlled by U.S. utility giant NextEra Energy (NEE 1.85%) owns around 730 miles of natural gas pipelines, and roughly 5.3 gigawatts of solar and wind power assets. So it has a little bit of exposure to carbon fuels, but the big story is clean energy. The solar and wind power NextEra Energy Partners generates, meanwhile, is largely sold under long-term contracts. So, like Kinder Morgan, its business is fairly stable.
2. Growth potential
Owning crucial physical assets and charging fees for the use of those assets make for a reliable business, but both Kinder Morgan and NextEra Energy Partners need to invest to grow. That means building or buying new assets. Kinder Morgan has around $4 billion of capital projects in its backlog, with roughly $2.8 billion of that spending expected to come on-line between now and the end of 2023. All of this spending is on oil and natural gas infrastructure, either building from the ground up or expanding on existing assets. These investments should keep the company's top line growing, and its dividend on an uptrend (more on the dividend below).
NextEra Energy Partners is a bit different. For one, its growth is largely going to come from investments in the clean energy space. But unlike Kinder Morgan, its path to growth is its relationship to NextEra Energy. NextEra Energy Partners is, effectively, a funding vehicle for its parent, which is the one that is actually building the assets. Once these projects are completed they get sold, or passed down, to NextEra Energy Partners. Based on the strong demand for renewable energy, NextEra Energy Partners expects to continue buying assets from its parent at a fairly rapid clip. Backing that up is NextEra Energy's backlog of as much as 18.5 gigawatts worth of renewable power projects through 2022.
NEP Financial Debt to EBITDA (TTM) data by YCharts
The downside to this is that NextEra Energy Partners is likely to sell units and take on debt to buy these renewable power assets (Kinder Morgan has been attempting to internally fund as much of its growth as it can to limit its need to tap the capital markets). The upside is that, given the current low-yield environment and the partnership's record-high unit price, it should have no problem adding new assets to its portfolio in an accretive manner. Still, this is a very different model from Kinder Morgan's, and investors should monitor the impact of dilution and leverage levels. For reference, Kinder Morgan tends to have more leverage than its closest midstream peers, and NextEra Energy Partners has more leverage than Kinder Morgan.
NEP Average Diluted Shares Outstanding (Quarterly) data by YCharts
3. How about those distributions
So we know the differences between the two business models here and what underpins growth. The next thing dividend investors will want to know is what all this means for dividend growth. At this point, Kinder Morgan is planning to increase its dividend by 25% in 2020. That comes on top of a similar increase in 2019 and an even larger one in 2018. But those massive dividend hikes are coming off of a low base, given that Kinder Morgan cut its dividend 75% in 2016.
In fact, even after a string of large dividend hikes, the dividend won't be back to the absolute level it was at prior to the cut. So these increases are more about normalizing the dividend than something that investors can look at as an ongoing run rate. Kinder Morgan expects to cover its current distribution by an incredibly strong 2.2 times in 2019, so there's ample room for dividend hikes. But 25% is unlikely to be sustainable for much longer, and at this point management isn't making any promises beyond 2020. Based on the company's peer group, a drop into the mid- to high-single digits is probably a reasonable expectation.
NextEra Energy Partners, meanwhile, is projecting distribution growth of between 12% and 15% a year through 2024. However, achieving that will depend on two key factors. First, and most important, NextEra Energy needs to actually complete the assets it plans to build. Then NextEra Energy Partners needs to maintain access to relatively low cost capital in order to buy those assets from its parent. If either of those things don't work out as currently expected, NextEra Energy Partners could fall short of its distribution growth goals.
Who wins this toss up?
It should be difficult for any investor to look at Kinder Morgan without thinking back to that massive dividend cut. It was a good move for the company, but a painful one for dividend investors -- especially since Kinder Morgan was projecting a dividend increase of as much as 10% just two months or so before it made the cut. As such, Kinder Morgan doesn't get the nod here, despite the impressive dividend growth it has provided over the last couple of years. (There are other midstream options with better track records.)
With a financially strong parent, NextEra Energy Partners looks a lot more enticing. But its dividend growth is highly dependent on investors continuing to support its unit price, which is what will allow it to buy the assets NextEra Energy plans to build. With clean energy in high demand on Wall Street and main street, however, that's probably a more desirable risk to take here.
