Midstream industry giant Kinder Morgan (KMI 0.03%) has done incredible things with its dividend in recent years, doubling it between 2017 and 2019. As part of those dividend plans from a few years ago, it promised another sizable increase in 2020. When the time came, though, its 2020 dividend hike came up well short of its original plan. What's going on and is there a reason to worry? The company's history on the dividend front suggests at least some concern is in order. 

A look back

At the end of 2015 Kinder Morgan was paying a quarterly dividend of $0.51 per share. In late October of that year, when the company announced the fourth-quarter dividend (which was increased by a penny over the third quarter), CEO Richard Kinder noted that, "As a company, we remain focused on our goals to continue to return cash to our shareholders in increasing amounts, to maintain our investment grade ratings and leverage targets while funding our business in the most efficient and economical way possible." Notice that dividends came first in that list. 

A piggy bank with word dividend on it

Image source: Getty Images

Further down in the earnings release, meanwhile, he explained, "Additionally, while we are at the beginning of our budget process for 2016, we currently expect to increase our declared dividend for 2016 by 6 to 10 percent over the 2015 declared dividend of $2.00 per share. We expect this range will provide the flexibility for us to meet our dividend and have excess cash coverage." There are no certainties when it comes to investing, but the CEO of Kinder Morgan was pretty much making a commitment to a sizable dividend hike in 2016. 

But the energy sector was going through a difficult period, and as he also noted in the earnings release, Kinder Morgan was not immune to the impact. On Dec. 4 the midstream giant reaffirmed its growth expectations for 2016, noting that it would be enough to support its previous dividend guidance. But he also said that the cash that would be used to fund the dividend could "alternately" be used to fund the company's capital spending plans instead. Four days later the dividend was cut by a massive 75%. 

Old lessons can be important

That's ancient history on Wall Street. And to be fair, Kinder Morgan probably made the right call for its business, even if the move left dividend investors reeling. In fact, the freed up cash not only allowed the company to invest in its business, but also allowed it to work on reducing leverage. The truth is that Kinder Morgan is in much better financial shape today than it was in 2015. That wouldn't be the case if it had chosen to keep paying a dividend at its previous rate. 

Meanwhile, in mid-2017 the company announced a multi-year plan to boost the dividend. The goal was a huge 60% increase in 2018, to be followed by 25% increases in 2019 and 2020. It met the first target with an increase in April 2018. It met the second target with an increase in April 2019. But in April of 2020, the company only hiked the dividend by 5%.

On the one hand, it's hard to complain about a 5% dividend increase. On the other hand, investors had been expecting a much larger hike based on management's frequently repeated dividend guidance.

When Kinder Morgan announced the 5% hike, Kinder, who is now the Executive Chairman, noted that:

The board deliberated thoughtfully with regard to this quarter's dividend. While we have the financial wherewithal to pay our previously planned dividend increase, with significant coverage, in unprecedented times such as these, the wise choice is to preserve flexibility and balance sheet capacity. Consequently, we are not increasing the dividend to the $1.25 annualized that we projected, under far different circumstances, in July of 2017. Nevertheless, as a sign of our confidence in the strength of our business and the security of our cash flows, we are increasing the dividend to $1.05 annualized, a five percent increase. In doing so, we believe we have struck the proper balance between maintaining balance sheet strength and returning value to our shareholders. We remain committed to increasing the dividend to $1.25 annualized. Assuming a return to normal economic activity, we would expect to make that determination when the board meets in January 2021 to determine the dividend for the fourth quarter of 2020.

That sounds kind of familiar to the scenario that played out at the end of 2015. Noteworthy as well is the fact that, despite a definite improvement in the company's financial debt to EBITDA ratio, leverage is still higher than at some of its more conservative peers. In other words, part of what led to the 2016 cut was still an issue, complicated again by a difficult energy market. 

KMI Financial Debt to EBITDA (TTM) Chart

KMI Financial Debt to EBITDA (TTM) data by YCharts

Kinder Morgan is, once again, likely making the right call for the company. But investors have every right to be a little put off by the fact that for several years management had been telegraphing a 25% dividend hike in 2020, and now it has basically been taken off the table. When you add in the 2016 cut and the still-difficult conditions in the oil space, conservative income investors should be paying very close attention to the company today. The fact is that there are alternatives in the sector, such as bellwether Enterprise Products Partners (EPD 0.78%), that have much better distribution histories and higher yields. For reference, Kinder's yield is around 6.6%, while Enterprise comes in at roughly 9.5%, with an annual distribution increase record that stretches for more than two decades. 

Worth a second look

None of this is to suggest that a dividend cut is imminent at Kinder Morgan, or that it is a poorly run pipeline company. However, making promises to investors and then failing to live up to them is a big warning sign. Trust should be an issue here. As the old saying goes, fool me once, shame on you; fool me twice, shame on me. If you own Kinder Morgan or are thinking about buying it, the most recent dividend news is a good reason to rethink that choice. It is not the only large midstream company out there with a generous yield.