Please ensure Javascript is enabled for purposes of website accessibility

Forget ONEOK: Kinder Morgan Is a Better Dividend Stock

By Matthew DiLallo – Jun 8, 2020 at 10:19AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ONEOK's payout is on shaky ground these days.

ONEOK (OKE 0.79%) currently offers income investors an enticing 8.3% dividend yield, which is quite a bit above Kinder Morgan's (KMI 1.49%) 6.3% payout. However, that higher yield comes with a much higher risk profile. That means dividend investors are better off forgetting about ONEOK right now and should instead consider buying Kinder Morgan for its payout.

ONEOK's numbers tell a worrisome story

ONEOK initially expected 2020 would be a monster year. However, with all the volatility in the oil market, the company had to water down its outlook. Now it expects to generate only between $1.785 billion and $2.185 billion in distributable cash flow this year. That's well below its initial outlook that it would produce between $2.245 billion and $2.505 billion in cash, which would have been 18% ahead of 2019's level.

$100 bills with the word dividend on a piece of paper.

Image source: Getty Images.

The significant reduction in ONEOK's outlook is worrisome, given its funding needs and the current state of its balance sheet. For example, the dividend consumes around $385 million of cash per quarter, suggesting the company would pay out about $1.54 billion this year at the current rate. That would leave it with only between $245 million and $645 million of retained cash for expansion projects. However, with the company on track to spend $1.4 billion to $1.8 billion this year, even after trimming its budget by $900 million, it has a large funding gap.

On a positive note, ONEOK was able to use its investment-grade balance sheet to raise more debt, issuing $1.75 billion in bonds in March and another $1.5 billion in May. However, it paid a much higher price for that second tranche of new debt because its leverage ratio is starting to become a concern. The ratio rose to 4.86 at the end of the first quarter, well above its sub-4.0 target. That number is likely to continue growing as ONEOK outspends cash flow to fund its dividend and capital expenses.

The concern is that if market conditions deteriorate again, ONEOK might need to reduce its dividend and use that money to finance capital expense as well as pay down debt.

Kinder Morgan's numbers point to sustainability

Kinder Morgan has also experienced some impact from this year's downturn in the oil market. The company initially anticipated that it would generate $5.1 billion in cash. It also expected to increase its dividend by 25% and maintain a leverage ratio of 4.3, which would have been comfortably below its 4.5 target. 

However, because of the turbulent market conditions, Kinder Morgan now expects to produce only $4.6 billion in cash. Because it also sees its leverage ratio rising to 4.6 this year, Kinder Morgan increased its dividend by only 5%.

On a more positive note, that payout is on a much firmer foundation than ONEOK's. That's because Kinder Morgan will only pay out $2.39 billion to cover its dividend, leaving it with $2.1 billion in excess cash. With only $1.7 billion of capital projects on the docket, Kinder Morgan will generate free cash after funding the dividend and capital expenses, which provides it with additional financial flexibility. 

Meanwhile, Kinder Morgan remains committed to eventually providing investors with a full 25% dividend increase. If market conditions continue improving, Kinder Morgan could approve an additional raise before the end of the year.

More sustainable with visible upside

ONEOK currently offers dividend investors a higher yield. However, that payout is on shaky ground given ONEOK's financial situation.

On the other hand, Kinder Morgan's dividend is on solid ground since it's on track to generate enough cash to cover its payout and capital expenses with room to spare, so it should be able to provide its investors with another raise. That combination of sustainability and upside make Kinder Morgan a much better option for income investor these days.

Matthew DiLallo owns shares of Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends ONEOK. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
$16.33 (1.49%) $0.24
ONEOK, Inc. Stock Quote
$50.98 (0.79%) $0.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.