Incentives matter on Wall Street, and far too often the wrong incentives get insiders paid at the expense of investors. But sometimes you can find situations where the interests of shareholders and company management are tightly aligned, producing as close to a win/win for investors as possible. That's one of the big reasons for income investors to like giant, high-yield midstream players Enterprise Products Partners (EPD 1.48%) and Kinder Morgan (KMI 3.13%).
More hikes to come
Midstream master limited partnership (MLP) Enterprise Products Partners has insider ownership of roughly 32%, virtually all of which is owned by the family of the partnership's co-founder Dan Duncan. That means that the people who control this energy infrastructure behemoth are collecting nearly one third of the distributions it throws off. Total distributions in 2021 were around $3.93 billion, so a third of that is about $1.3 billion. That's a huge sum of money, and it helps to insulate the hefty 7.6% distribution yield from a downward revision. Indeed, if unitholders take a distribution haircut, so does the Duncan family and other insiders.
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But a cut is highly unlikely to happen here. For starters, the North American midstream giant's assets are largely fee-based and produce very reliable cash flows. Second, it has an investment-grade-rated balance sheet, which means it can access debt fairly easily if it should need to. And third, distributable cash flows covered the distribution by a massive 1.9 times in the second quarter. A lot would have to go wrong before the distribution was at risk here.
As for the future, Enterprise has $5.5 billion worth of capital investment projects in the works. That, combined with the insider ownership and strong distribution coverage, suggest that continued distribution increases are the likely outcome. At this point, Enterprise has upped its payment for a solid 24 years. If you are an income-focused investor, this is a name you'll want to dig into.
Not quite as good, but not bad
Kinder Morgan's insider ownership is centered around the 11% or so of stock owned by former CEO and current executive chairman of the board David Kinder. In total the management team and board of directors own around 12.5% of the shares. That's not as sizable a stake as what insiders own at Enterprise, but it is still notable.
Basically, any change in the distribution takes direct aim at David Kinder's income stream. But, interestingly enough, CEO Steven Kean only earns a dollar a year in salary, with the rest of his compensation coming in the form of stock and the dividends those shares produce. So while he may not have as big a stake in the company, he's still highly motivated by the dividends his shares throw off.
That said, you have to take a grain of salt here. While the current yield is an enticing 6.4%, management did actually cut the payment in 2016. And that was after saying that the dividend would be increased just a few months earlier. This might cause more conservative income investors to pass, despite David Kinder's material ownership stake. That makes sense, but remember that David Kinder took the hit along with his investors during a period of industry weakness. That doesn't change the cut, but it may give some investors a different view of the event since Kinder, who was the CEO at the time, took the hit, too.
The dividend is back on the growth track for those willing to look past the cut. And distributable cash flow covered the dividend by just shy of 1.9 times in the second quarter. Also important to highlight: In 2020, when the coronavirus pandemic was upending demand in the energy sector, Kinder Morgan provided a 5% dividend increase in an effort to ensure it wouldn't have to cut the dividend again in the future. That seems fairly generous, but management had promised a higher number. It was clearly a more shareholder-friendly call to be conservative, just in case. It also suggests management learned its lesson from 2016 regarding Wall Street's reaction to dividend cuts, which tends to be pretty negative. Indeed, better a safe dividend than a dividend cut.
Like Enterprise, with a high distributable cash flow coverage ratio and at least one big insider with a huge stake in the company, dividend increases seem more likely than cuts. Adding to the conviction of that statement is the $2.1 billion of capital projects in Kinder Morgan's backlog.
Plenty of room to spare
Even if the material insider ownership at Enterprise Products Partners and Kinder Morgan don't persuade you that the insiders at these midstream giants are aligned with you, the robust distribution coverage hints that increases are still highly likely in the future. And that's on top of the big yields these stocks are offering today. If you like dividends, you'll want to consider locking in these two midstream players' income streams while they are still attractively high. More conservative types will probably be better off with Enterprise, while more aggressive investors willing to overlook the dividend cut transgression might find Kinder Morgan equally as attractive.
