A lot has changed for midstream stocks in the last decade, and even more for Children Morgan (KMI -0.17%). If you’re looking at this energy infrastructure stock today and think it has a reliable cash-generating business, you need to consider it relative to other alternatives. When you take the time to compare and contrast, Kinder Morgan just doesn’t do very well. And this is a warning that has implications for the future.
Kinder Morgan made it difficult
Cutting dividends isn’t something most companies want, but sometimes it’s the right decision. This was the case with Kinder Morgan in 2016, when the company cut its dividend by around 75%. This happened because management had to choose between paying a dividend or putting money into capital investment projects that would support the company’s growth. Expanding the business was the right decision, although investors counting on the dividend were likely disappointed.
However, part of the problem was that Kinder Morgan used leverage more aggressively than its competitors. For example, Enterprise Products Partner (EPD -1.13%) had a debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio that was significantly lower than Kinder Morgan’s when Kinder Morgan’s dividend was cut. Enterprise Products Partners has not cut its sales and has increased annually for 25 consecutive years at this point. Kinder Morgan’s leverage is lower today, but the company still tends to use higher leverage than Enterprise.
Kinder Morgan’s decision to cut its dividend for investors has repercussions as the midstream sector’s growth outlook has changed. Before 2016, the sector experienced strong growth thanks to significant new investments. From this point on, it became increasingly difficult to find new investment opportunities and growth slowed. Investors responded by moving to more interesting sectors. As the chart below shows, both Enterprise and Kinder are still below their peak from a decade ago.
More pain, less gain
Kinder Morgan’s stock decline was likely greater than Enterprise’s due to the dividend cut. And thanks to the dividend cut, Kinder Morgan’s dividend reinvestment bought significantly fewer shares than Enterprise’s distributions. Total return assumes reinvestment of dividends and changes the story significantly, as the chart below shows.
Even with dividends reinvested, Kinder Morgan’s total return over the last decade is still negative. Enterprise’s total return, on the other hand, ranges from negative to significantly positive. In short, Enterprise was a much better investment. The counterargument is that this is a history lesson and investors need to think about the future. There’s just one other point to keep in mind: Kinder Morgan has a habit of overpromising and underdelivering.
At the end of 2015, management told investors that it could increase the dividend by up to 10% in 2016. Just a few months later, the dividend was cut. To regain investor confidence, management promised to increase the dividend quickly, including a 25% increase in 2020. In 2020, the dividend was ultimately only increased by 5%.
It would be entirely reasonable for investors to have trust issues here. Combine that with the below-average total returns achieved, and conservative dividend investors will likely feel more comfortable owning other middle-market companies, perhaps Enterprise Products Partners.
Not bad, but there is better
It would be going too far to say that Kinder Morgan is a bad midstream company. However, there are better ones, such as Enterprise. And today, you can earn even more income from Enterprise, which yields 7.5%, than if you bought Kinder Morgan, which yields 6.4%. Looking at the bigger picture, including history, Enterprise will likely be the more attractive choice for most investors. Or to put it another way: Kinder Morgan probably isn’t a particularly attractive buy today.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.