Operationally speaking, Kinder Morgan (NYSE:KMI) is doing pretty well right now. That is highlighted by the company's 25% dividend increase in 2019, with another hike of the same size currently planned for 2020. At the goal run rate of $1.25 per share per year, management is gloating that it will have increased the dividend by an incredible 150% over the 2017 level.

All of this sounds pretty good, until you step back and look at what happened in 2016. When you do that, Kinder Morgan still has a lot to prove. 

Bad math

On Oct. 21, 2015, Kinder Morgan reported third-quarter earnings and announced that it planned to increase its dividend by as much as 10% in 2016. On Dec. 8, 2015, Kinder Morgan changed direction and announced that it would, instead, cut the dividend by 75%.

To put some numbers on that, in October 2015, the annual run rate of the dividend was $2.04 a share, with more increases expected in the near future. As 2016 began, though, the run rate was cut to just $0.50 per share with no clear path to future increases.     

A man holding a small umbrella over a bag with a dollar sign on it and four blocks that spell out "risk" -- both balancing on a board in front of him

Image source: Getty Images.

The main reason for the dividend cut was that Kinder Morgan needed to find cash to fund its capital investment program. The options at the time were all fairly bad. Selling stock would have been a poor choice because the midstream sector in which Kinder Morgan operates was out of favor. Selling stock at depressed prices is never good. The company's balance sheet, meanwhile, was already debt heavy, so selling more debt wasn't particularly appealing either (and it likely would have been expensive). That left cutting the dividend to free up cash, a decision that would hurt shareholders who were relying on the dividend. 

In the end, the dividend cut was probably the best move for the company even if ended up hurting investors. The company used 2016 and 2017 to turn things around, shoring up its balance sheet while still investing for the future. And in 2018, Kinder Morgan increased its dividend by a huge 60%. It followed that up with a 25% increase in 2019. The planned increase of 25% in 2020 basically fulfills a promise the company made in mid 2017 to get its dividend back on a growth track.    

Don't forget the past

There's no question that Kinder Morgan is in a better financial position today than it was when it made the hard call to cut the dividend. For example, the company's financial debt to EBITDA ratio peaked at around 9 times in 2016 but is currently around 5.3 times. Adjusted earnings through the first nine months of 2019, meanwhile, were up 8% year over year, with cash available for distribution up 5%. The company expects to cover the dividend by an incredibly strong 2.2 times in 2019. That suggests that it can easily support more dividend growth in the future.   

So far so good, but there are some additional factors to consider. For starters, even after increasing the dividend by 150%, the annual run rate in 2020 will still be nearly 40% below the dividend run rate prior to the 2016 dividend cut. In other words, Kinder Morgan is moving in the right direction, but investors who have hung on, expecting better days, are still a long way from where they were before the cut. 

KMI Financial Debt to Equity (Quarterly) Chart

KMI Financial Debt to Equity (Quarterly) data by YCharts

Then there's the even more important issue of leverage. There's no question the company's debt to EBITDA ratio has dramatically improved. However, Kinder Morgan still makes relatively aggressive use of its balance sheet compared to more conservative players in the midstream space. At about 5.3 times, the company financial debt to EBITDA ratio is still way higher than super conservative Magellan Midstream Partners' (NYSE:MMP) 2.9 times and industry bellwether Enterprise Products Partners' (NYSE:EPD) 3.3 times. While you could argue that those two aren't perfect comparisons because they are master limited partnerships, Kinder Morgan's number is also higher than ONEOK's (NYSE:OKE) 4.1 times financial debt to EBITDA ratio. What's most interesting here, though, is that this isn't a one-time thing -- Kinder Morgan has historically used leverage more aggressively than these peers. 

To look at this a different way, Kinder Morgan's financial debt-to-equity ratio is roughly 0.77 times. ONEOK's ratio is roughly 0.41 times -- which is roughly in line with Enterprise and Magellan. While Kinder Morgan's financial debt to equity is down from over 1.2 times in 2016, it still remains relatively high. Yes, Kinder Morgan has moved in a better direction, but it hasn't materially changed its ways when it comes to leverage. And since excessive use of leverage was one of the reasons the dividend was cut 2016, it should be hard for more conservative investors to look at Kinder Morgan today without some trepidation. 

To be fair, the company recently sold its stake in a Canadian pipeline company with plans to reduce debt even further. But until it has proven that lower leverage will be the new normal, most investors should take a wait-and-see approach.

Not there just yet

When a company says one thing and does another, investors need to proceed with extra caution. That's exactly what happened in late 2015 at Kinder Morgan. Since that point, the midstream giant has been earning back investor trust by reducing leverage and materially increasing the dividend. But when you dig a little deeper, you see that Kinder Morgan still has more to prove. Despite the much-hyped dividend increases, income investors are still short of where they were before the cut. And while leverage ratios are better, Kinder Morgan still appears to be more aggressive with its balance sheet than peers. There are simply better options for conservative investors looking at the midstream space today.