Published March 10th, 2017 by Bob Ciura
Kinder Morgan (KMI) and Enterprise Products (EPD) are two of the biggest oil and gas transportation companies in the U.S.
Both companies operate in the midstream segment, which means their assets are comprised mainly of oil and gas pipelines and terminals.
However, they are very different in terms of dividends.
In December 2015, Kinder Morgan cut its dividend by 75%.
It had an over-leveraged balance sheet, and when commodity prices crashed, decided to cut its shareholder payout to pay down debt.
Enterprise Products has raised its distribution 59 times since its initial public offering in 1998.
It has also increased its dividend for 50 quarters in a row, a streak going back 12 years.
As a result, Enterprise Products is a Dividend Achiever, a group of 271 stocks with 10+ years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
This article will discuss which of the two infrastructure giants is the better investment today.
Winner: Kinder Morgan
Kinder Morgan is the largest energy infrastructure company in the U.S., with 84,000 miles of pipelines and 155 terminals.
It also has the largest natural gas network in the U.S.
Source: Barclays IG Energy and Pipeline Conference, page 3
The two companies both have access to the premier oil and gas producing fields in the U.S., and they operate similar business models.
As pipeline and terminal operators, Kinder Morgan and Enterprise Products are essentially toll roads. They collect fees based on volumes being transported through their systems.
Enterprise Products operates 49,000 miles of pipelines, with over 400 miles of pipelines under construction.
Source: March Analyst Conference, page 8
This fee-based structure provides stability, and less exposure to commodity prices.
One difference between the two companies is that Enterprise Products is an MLP, while Kinder Morgan is a C-Corp.
In 2014, Kinder Morgan consolidated its various businesses, in a $70 billion deal. Before then, Kinder Morgan traded independently from the pipeline companies.
Several entities had traded on their own, including KMP, KMR, and EPB. But after its “roll-up” of the various partnerships, it now operates as a single entity.
Kinder Morgan now trades under just one stock, as opposed to four stocks that previously traded under the Kinder Morgan umbrella.
This was a good move, because it simplified the company’s operating structure.
Source: Barclays IG Energy and Pipeline Conference, page 4
Master Limited Partnerships, like KMP and Enterprise Products, can be more complicated to own from a tax standpoint. For example, investors receive K-1 statements each year.
Plus, Kinder Morgan’s roll-up allowed it to eliminate incentive distribution rights, and lower its cost of capital.
As a result, Kinder Morgan gets the nod here for its simplified operating structure.
Winner: Enterprise Products
Kinder Morgan is more concentrated on natural gas, relative to crude oil and terminals. Natural gas pipelines make up more than half of the company’s earnings.
Source: Barclays IG Energy and Pipeline Conference, page 7
The downside of Kinder Morgan’s exposure to natural gas, is that it is under-performing. In 2016, earnings before depreciation and amortization (EBDA) increased 5% in the core natural gas business.
Meanwhile, segment earnings from the carbon dioxide and terminals businesses increased 26% and 22%, respectively.
For the year, Kinder Morgan’s distributable cash flow declined 4%. And, the company expects 2017 distributable cash flow will decline another 1%.
Enterprise Products grew distributable cash flow by 2.5% last year, to $4.1 billion.
Because of its focus on oil, which has been more resilient relative to natural gas, Enterprise Products has an advantage in terms of future growth potential.
Another advantage is Enterprise Products’ growing export business, which is a compelling growth catalyst for the oil transportation industry.
Source: March Analyst Conference, page 17
In late 2015, the U.S. government ended its 40-year ban on oil exports. Enterprise Products won the first contract, just days after the ban was lifted.
Last year, Enterprise Products transported a record 877,000 barrels per day of U.S. LPG. The company also began transporting natural gas to Mexico.
Kinder Morgan is also building its exports business, and has a Canada operation, but Enterprise Products has an early lead in exports.
Winner: Enterprise Products
Kinder Morgan’s current annualized dividend is $0.50 per share. This represents a 2.3% dividend yield, which is only slightly above the S&P 500 average dividend yield.
Enterprise Products has an annualized distribution of $1.64 per unit, which yields 6%.
The difference is mostly due to Kinder Morgan’s dividend cut.
Meanwhile, Enterprise Products continued to raise its distribution through the downturn. It typically raises its dividend by a small amount each quarter.
Source: March Analyst Conference, page 141
For example, Enterprise Products’ first-quarter 2017 dividend was approximately 5.1% higher than the same payout last year.
Another reason why Kinder Morgan’s dividend is less attractive, is because it may not return to dividend growth this year.
Kinder Morgan has a lot of work to do to restore its financial position. It needs to pay down debt, maintain existing projects, and finance new projects—all without issuing too much dilutive equity.
As a result, there is only so much cash flow to go around.
At the end of 2016, Kinder Morgan held a net-debt-to-adjusted-EBITDA ratio of 5.3. Management has communicated its desire to get this down closer to 5.0 by the end of 2017.
For its part, Enterprise Products held a leverage ratio of 4.4 at the end of the year.
Kinder Morgan will likely prioritize paying down debt and maintaining its project backlog, which means a 2017 dividend raise is doubtful.
Enterprise Products generated 20% more distributable cash flow last year than it needed for its distribution.
It should have no trouble continuing to raise its distribution in 2017.
When it comes to dividends, this one is a ‘no contest’ verdict—Enterprise Products wins.
Kinder Morgan holds a higher level of debt than Enterprise Products. It paid a steep price for its overleveraged balance sheet, by having to slash its dividend.
It is steadily working its way back, but a dividend increase will probably not come until 2018.
Enterprise Products has a dividend yield almost three times Kinder Morgan’s. And, it will likely continue raising its distribution in 2017.
For these reasons, Enterprise Products is the better dividend stock to buy.