Kinder Morgan (NYSE:KMI) and Enterprise Products Partners (NYSE:EPD) are giants in the deeply out-of-favor energy sector. That could present an opportunity for investors who believe that oil and natural gas will remain important energy sources for years to come. But is one of these two high-yield stocks a better buy than the other today?
1. Size and scale
Kinder Morgan has a market cap of $28 billion. Master limited partnership Enterprise Products Partners has a market cap of roughly $34 billion. While Enterprise is a bit bigger by this measure, both are very large players in the North American oil and natural gas midstream sector. Indeed, they each have a material and diverse collection of assets that would be difficult, if not impossible, to replace.
Although not interchangeable investments, both Kinder Morgan and Enterprise provide investors fairly broad exposure to the midstream niche of the North American energy sector. From this perspective the two are very similar.
2. Corporate form
One area in which the two differ materially is in corporate structure. Kinder Morgan is set up as a typical corporation, nothing complicated. Enterprise Products Partners is a master limited partnership. This is a bit more complicated, as unitholders are considered part-owners of the business. Investors must deal with K-1 forms at tax time, among other things (some positive, some negative). Perhaps most significantly, partnerships don't always play nicely with tax-advantaged retirement accounts.
If you are looking to keep your life as simple as possible, Kinder Morgan is the choice for you. It is highly advisable that you talk to a tax specialist if you own partnerships like Enterprise.
Kinder Morgan offers investors an 8.5% dividend yield today. Enterprise Products Partners' distribution yield is 11.5%. Kinder Morgan's distributable cash flow covered its distribution by roughly 1.7 times in the second quarter, with Enterprise coming in with coverage of 1.6 times. Both offer material coverage for their disbursements, especially given that the second quarter was not a particularly good one for either entity. From a yield perspective, Enterprise has the edge.
4. Streaks and promises
Adding to the lead on the yield front is the fact that Enterprise has increased its distribution annually for 23 consecutive years. That said, after a token 0.5% increase in the first quarter of 2020, Enterprise has said it plans to hold the distribution steady for a bit because of energy industry headwinds. That follows a long string of quarterly hikes. Based on the solid distribution coverage, it doesn't look like Enterprise's distribution is at risk, but management has clearly decided to be more conservative in the face of uncertainty.
That's similar to what happened at Kinder Morgan, which upped its dividend 5% in the first quarter after having promised for several years to enact a 25% increase in 2020. During Kinder Morgan's second-quarter earnings conference call in July, management stated that it is committed to the full increase, but that it wants to make sure it can make the hike and sustain it. Thus, the increase may be spread over a longer time period. That doesn't exactly inspire confidence, especially when you note that Kinder promised to raise its dividend as much as 10% in 2015 before cutting it by 75% just a couple of months later. Investors would be right to have some trust issues here.
One of the reasons Kinder Morgan cut its dividend in 2016 was that it was carrying a material amount of leverage at a time when the midstream sector was facing headwinds. The cut was meant to help fund growth plans and, at the same time, allow management to bring down the company's leverage. It has achieved that aim, with financial-debt-to-EBITDA dropping from over 9 in 2016 to around 6 today. But Enterprise's financial-debt-to-EBITDA ratio is still a far more modest 3.7.
Enterprise tends to be more conservative. In fact, Enterprise is basically a slow and steady tortoise in the midstream space. That's even more true today, as oil's low price suggests that growth will be more difficult to come by. While that's going to affect both names here, Enterprise's token 0.5% distribution increase in 2020 is being compared to a long-term trend of increases in the low- to mid-single-digit space -- not exactly a dividend growth investor's dream stock. Still, for conservative types, it has the edge here because of its commitment to a conservative balance sheet.
Looking at the points above, it appears Enterprise Products Partners is the better buy. It is financially conservative, has a long history of rewarding investors with regular distribution hikes, and offers a more material yield.
That's not to suggest that Kinder Morgan is a bad company, but most income investors would likely be better off with Enterprise today. But go in knowing that the downturn in the energy sector is going to make growth far more difficult, so most of the return here is likely to come from that fat yield.