If you are looking for a midstream giant to add to your portfolio, then Kinder Morgan (KMI 2.53%) and Enterprise Products Partners (EPD 0.18%) have to be on your short list. But which one is the better option is a complicated question. Here are some things to think about as you look at these two high-yielders.
1. Structure matters
Both Kinder Morgan and Enterprise focus on owning the pipelines, transportation, processing, and storage assets that help to move oil, natural gas, and the products into which they get turned around the world. They also favor toll-taker contracts, in which they get paid for the use of the asset, largely removing the risk of commodity price fluctuation from the picture. However, the ways they go about this are entirely different.
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Kinder Morgan is structured as a regular corporation, so there's not much to talk about there. But Enterprise is a master limited partnership (MLP). It's a unique business structure that treats unitholders as if they are direct owners of the assets. That allows for some tax advantages, but also increases the complexity of owning Enterprise. For example, you'll have to deal with a K1 form at tax time and you really shouldn't own the units in a tax-advantaged retirement account. In fact, it's probably a good idea to consult a tax expert if you own an MLP. If you like to keep things simple, Kinder Morgan is the better option.
2. Dividends and distributions
Kinder Morgan pays regular dividends while Enterprise Products Partners will spit out distributions. There are different tax consequences related to each, but there's one even bigger difference here that investors need to know: Kinder Morgan cut its dividend 75% in 2016 while Enterprise has a 24-year streak of annual distribution increases under its belt, putting it one year away from Dividend Aristocrat status.
To be fair, Kinder Morgan has started to increase its dividend again. But the backstory here is important, because just a couple of months before announcing that huge cut in 2016, management was telling investors to expect an increase of as much as 10%. Note, too, that in 2020 the dividend was increased 5% when management had for several years telegraphed a 25% increase. In both cases, management likely made the right call for the company, but investors might wonder if they can trust Kinder Morgan to live up to its word. More conservative income-focused investors will probably prefer Enterprise.
3. A changing world
If you are looking at this pair of midstream names you have to make sure you understand the energy transition that's taking shape today. Oil and natural gas will likely remain important for years to come, but clean energy is the long-term future. On that score, Kinder Morgan recently announced plans to start looking at ways to use its cash cow oil and natural gas assets to start expanding into areas that will benefit from the clean energy shift. That's a good start, though it is really just a start. Enterprise has not undertaken a similar effort. And while it has been looking at ways to clean up its environmental footprint, it's not the same as investing in the space. Neither one of these names is a clean energy play, but it looks like Kinder Morgan is getting a head start on Enterprise when it comes to shifting its model along with the world.
4. Big and getting bigger
Another interesting thing to consider as the world shifts toward clean power is that midstream players have historically grown by building new assets. If lots of new assets aren't needed, which appears likely in the future, then growth will probably come from acquisitions. Both Kinder Morgan and Enterprise are large and diversified enough to be major players in a consolidating industry. However, Enterprise's financial debt-to-EBITDA ratio is around 4.1 times, giving it plenty of leeway to make deals. Kinder Morgan's debt-to-EBITDA ratio has historically sat toward the high end of the industry. The figure was around 5.3 times at the end of the first quarter of 2021, which is a vast improvement from the roughly 9 times figure when it cut the dividend.
Still, Kinder Morgan has more leverage on its balance sheet than Enterprise and that puts it at a disadvantage when it comes to acquisitions. Given the improvement in its leverage position, Kinder Morgan will still likely be a big player if consolidation becomes a theme, but it may end up more limited in what it can do. Conservative types will probably want to keep a close eye on Kinder Morgan's debt levels.
A complicated answer
There are clearly other things you need to consider when looking at Kinder Morgan and Enterprise Products Partners than are listed here. However, these four points are pretty big ones that should be top of mind, and the takeaways could make your decision easier -- or harder. For investors willing to forget past transgressions and look forward, Kinder Morgan's clean energy move could make it the winner. But that's only if you can accept the higher leverage, which could make growth more difficult to support. All in, however, conservative types seeking reliable income will probably find Enterprise to be the better call. That still comes with a caveat, though, given that you have to be comfortable with the MLP structure.
