A lot has changed for midstream stocks over the past decade, and even more so for Kinder Morgan (KMI -0.64%). If you are looking at this energy infrastructure stock today thinking that it has a reliable cash-generating business, you need to consider it against other alternatives. If you do take the time to compare and contrast, Kinder Morgan just doesn't stand up very well. And that's a warning that has ramifications for the future.
Kinder Morgan made a hard call
Cutting a dividend is not something that most companies want to do, but sometimes it is the right choice. This was the case for Kinder Morgan in 2016, when it cut its dividend by roughly 75%. This was done because management had to choose between paying the dividend or putting money to work in capital investment projects that would grow the company. Growing the business was the right choice, even though investors that were counting on the dividend were likely disappointed.
KMI Financial Debt to EBITDA (TTM) data by YCharts
That said, a part of the problem was Kinder Morgan's more aggressive use of leverage than its peers'. For example, Enterprise Products Partners (EPD 0.45%) had a debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio notably below that of Kinder Morgan when Kinder Morgan's dividend was cut. Enterprise Products Partners didn't cut its distribution and, at this point, has increased it annually for 25 consecutive years. Kinder Morgan's leverage is lower today, but it still tends to use more leverage than Enterprise.
There's been a lingering consequence from Kinder Morgan's decision to cut its dividend for investors as the midstream sector's growth prospects have shifted. Prior to 2016, the sector was growing strongly thanks to material new investments. After that point it became increasingly difficult to find new investment opportunities, and growth slowed down. Investors reacted by moving on to more interesting sectors. As the chart below shows, both Enterprise and Kinder are still below their peak levels from a decade ago.
More pain, less gain
Kinder Morgan's stock drop was likely larger than that of Enterprise because of the dividend cut. And, thanks to the dividend cut, reinvestment of Kinder Morgan's dividend bought materially fewer shares than what the distributions from Enterprise bought. Total return assumes the reinvestment of dividends and it changes the story in a big way, as the chart below highlights.
Even with dividends reinvested, Kinder Morgan's total return is still negative over the past decade. Enterprise's total return, on the other hand, goes from negative to soundly positive. In short, Enterprise has been a much better investment. The counter argument is that this is a history lesson, and investors need to think about the future. Only there's one more issue to consider -- Kinder Morgan has a habit of overpromising and underdelivering.
At the end of 2015, management was telling investors that it would be able to increase the dividend by as much as 10% in 2016. Just a couple of months later, the dividend was cut. To earn back investor trust, management promised it would quickly grow the dividend, including a 25% hike in 2020. In 2020 the dividend ended up being increased by just 5%.
It would be completely reasonable if investors had some trust issues here. Combine that with the subpar total returns achieved, and conservative dividend investors will probably be more comfortable owning other midstream companies, perhaps Enterprise Products Partners.
Not bad, but there's better
It would be going too far to say that Kinder Morgan is a bad midstream company. However, there are better ones, like Enterprise, for example. And today you can even get more income from Enterprise, which yields 7.5%, than you would if you bought Kinder Morgan, which yields 6.4%. When you look at the full picture, including the history, Enterprise will probably be the more attractive choice for most investors. Or, put another way, Kinder Morgan probably isn't a particularly attractive buy today.
