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Better Buy: Brookfield Infrastructure vs. Kinder Morgan

By Matthew DiLallo - Apr 12, 2021 at 10:45AM

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These two infrastructure companies go head-to-head.

Infrastructure is vital to keeping the global economy running smoothly. While governments operate the bulk of the world's physical infrastructure, some are in private hands. Two of the leading private sector infrastructure operators are Brookfield Infrastructure (BIP 1.86%) (BIPC 1.01%) Kinder Morgan (KMI 1.31%).

Here's a closer look at the case for and against buying either one right now.

A burst of sunlight shining on a pipeline.

Image source: Getty Images

The bull and bear case for Brookfield Infrastructure

Brookfield Infrastructure operates a globally diverse infrastructure platform focused on transporting and storing energy, water, freight, passengers, and data. These assets tend to generate relatively stable cash flow backed by long-term contracts or government-regulated rates. That gives Brookfield the funds to pay an attractive dividend that currently yields 3.7% and invest in expansion opportunities. 

The company estimates that it has enough embedded growth from its existing portfolio via expansion projects, contract rate escalations, and higher volumes to grow its cash flow per share at a 5% to 9% annual rate for the next several years. On top of that, Brookfield believes it can supplement organic growth by recycling capital. It does that by selling mature assets (for example, Brookfield and Kinder Morgan recently sold a stake in Natural Gas Pipeline Company of America for $830 million) and using the proceeds to make higher return investments in new opportunities. Those growth drivers should give it the fuel to continue growing its dividend at an attractive rate over the next few years.

However, one concern with Brookfield is that it gets a large portion of its revenue from infrastructure tied to fossil fuels, including natural gas midstream infrastructure and utilities. That exposure could increase if the company is successful in its hostile takeover attempt of Canadian oil pipeline company Inter Pipeline (IPL). With the world rapidly pivoting toward lower-carbon energy sources like renewable energy, its exposure to fossil fuels could become a headwind in the future.

Aerial view of an oil terminal in a harbor.

Image source: Getty Images.

The bull and bear case for Kinder Morgan

Kinder Morgan is one of the largest energy infrastructure companies in North America. It operates about 83,000 miles of natural gas, gasoline, crude oil, carbon dioxide, and refined products pipelines. It also has a large-scale terminals platform that handles and stores renewable fuels, petroleum products, chemicals, and vegetable oils. Long-term contracts and government-regulated rates underpin most of these assets, enabling Kinder Morgan to generate relatively steady cash flow. 

Kinder Morgan currently expects to produce enough cash in 2021 to fund its 6.4%-yielding dividend and all its expansion-related capital spending with room to spare. That will provide it with the financial flexibility to further strengthen its already solid balance sheet, repurchase shares, and potentially make acquisitions.

However, one concern with Kinder Morgan is its lack of visible growth prospects. While Kinder Morgan routinely invests hundreds of millions of dollars per year into expanding its energy infrastructure network, its cash flow has been under pressure in recent years. Customer bankruptcies, lower rate contract renewals, lower oil prices, and asset sales have weighed on its results. That growth headwind could grow stronger in the future, given its focus on fossil fuels amid an accelerating shift toward renewable energy. While Kinder Morgan concentrates on the cleanest fossil fuel (natural gas) and is a leader in handing ethanol and carbon dioxide and emerging lower carbon fuels like biodiesel and renewable diesel, it's unclear how much it can grow in the future. That could impact its ability to increase its dividend. 

Visible growth could fuel bigger returns

Kinder Morgan and Brookfield Infrastructure each pay attractive dividends backed by stable infrastructure. However, Kinder Morgan's focus on fossil fuels could impact its ability to grow its cash flow in the future. On the other hand, Brookfield Infrastructure has clearly visible growth prospects. It could produce higher total returns, making it look like the better buy between the two right now.

 

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Stocks Mentioned

Brookfield Infrastructure Partners L.P. Stock Quote
Brookfield Infrastructure Partners L.P.
BIP
$38.93 (1.86%) $0.71
Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
KMI
$16.98 (1.31%) $0.22
Brookfield Infrastructure Corporation Stock Quote
Brookfield Infrastructure Corporation
BIPC
$42.93 (1.01%) $0.43
Inter Pipeline Ltd. Stock Quote
Inter Pipeline Ltd.
IPL

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

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