I invest almost exclusively in dividend stocks, intending to build an income stream that I can, one day, turn on in retirement. While not a hard and fast rule, I don't like to own companies that cut their dividends. But what I really don't like is companies that go back on a promise, especially when that promise is about the dividend.
That's why I'll never buy Kinder Morgan (KMI 0.86%) despite its attractive 6.2% dividend yield.
Kinder Morgan is not a bad business
Kinder Morgan is one of the largest midstream energy companies in North America. It owns a collection of energy infrastructure assets that would be hard, if not impossible to replace or displace. And it is large enough to act as an industry consolidator, which is important today because there are limited opportunities for ground up construction. From this perspective, there's nothing wrong with Kinder Morgan.
Image source: Getty Images.
The company is also financially strong, with an investment-grade-rated balance sheet. And, on the dividend front, Kinder Morgan has been increasing its dividend regularly each year of late. The dividend was covered 1.8 times over by distributable cash flow in 2023, which is very good.
The truth is, if you just look at the company as it stands today, there are reasons why investors would find it attractive. But I value dividend consistency very highly, so the company's 2016 dividend cut is something that causes me pause. The problem, however, is much bigger than it seems at first.
Nobody likes a cut, but a broken promise is worse
I can handle a dividend cut if there's a good reason for the board to make such a decision, e.g., a spin-off or asset sale that materially reduces revenue and earnings, or even an unexpected bad event, like a global pandemic. But what I don't like is when a company makes a bold promise that it misses by a mile.
In the case of Kinder Morgan that promise was made on Oct. 21, 2015, when management stated, "while we are at the beginning of our budget process for 2016, we currently expect to increase our declared dividend for 2016 by 6 to 10 percent over the 2015 declared dividend of $2.00 per share." Less than two months later, on Dec. 8, 2015, the company announced "that its Board of Directors has approved a plan pursuant to which it expects to pay quarterly dividends of $0.125 per share to its common stockholders ($0.50 annually)." Instead of the promised 10% increase, investors were given a 75% dividend cut.
To be fair, the energy sector was in bad shape at the time and Kinder Morgan had to choose between making growth-oriented capital investments or paying the dividend. It made the right long-term choice for the company. But if you are a dividend investor, like me, you'll probably be left with trust issues.
Sadly, Kinder Morgan did it again in 2020. The company had laid out an aggressive plan for dividend growth when the dividend started increasing again in 2018. That plan included a 25% dividend increase in 2020, but because of the pandemic, the board opted for 5% instead. Management noted, "The board remains committed to increasing the dividend to $1.25 annualized as we projected, under far different circumstances, in 2017." As of the first quarter of 2024, the annualized dividend was $1.13 per share, still far below the target set for 2020. Once again, the company probably made the right choice, given the uncertainty of the coronavirus pandemic, but investors who took the company at its word were let down one more time.
There are other options out there
If Kinder Morgan had only fallen short of its promise in 2020, I wouldn't have minded at all. But add that to the 2016 dividend cut, and I just can't look at the company the same way ever again.
Instead, I own its peer Enbridge (ENB -0.01%), which has increased its dividend for 29 consecutive years. You could also look at Enterprise Products Partners (EPD -0.40%), which has 25 years of distribution increases behind it. And here's the really interesting thing: Enbridge and Enterprise both have higher yields than Kinder Morgan today!
