If you look at midstream giant Kinder Morgan(NYSE: KMI) in isolation today, it seems like an attractive dividend stock. The yield is roughly 4% or so, which is higher than the 3.3% yield of the average energy company, using the Energy Select Sector SPDR ETF as an industry proxy. And the midstream company’s dividend has increased each year since 2018.
But don’t rush to buy Kinder Morgan until you’ve dug a little deeper in the midstream niche. Here’s why.
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Kinder Morgan is a midstream company, which means it owns energy infrastructure like pipelines and storage and transportation assets. Most of its revenue comes from fees that customers pay for the use of those vital assets.
Therefore, it tends to be fairly well-protected from the volatile price swings of oil and natural gas. Its above-average 4% yield is well supported, too, with the company’s distributable cash flow covering the dividend by a solid ratio of 1.7 in the third quarter of 2024.
Image source: Getty Images.
So there’s no particular reason to think the dividend is in any risk of being cut. It is, in fact, far more likely that it keeps growing over time. For some investors, that 4% yield will be very tempting, particularly given Kinder Morgan’s position as one of the largest midstream operators in North America. It would be understandable if you wanted to buy it, or keep owning it, but don’t do either just yet. There’s more to this story.
The stock has risen sharply over the past year, by over 60%! That’s a massive increase for what is typically a pretty boring niche of the energy sector. In fact, it is over twice the increase of some of the company’s closest peers, notably Enbridge(NYSE: ENB) and Enterprise Products Partners(NYSE: EPD). That 4% yield is actually around 40% below the stock’s highest yield over the past year. A lot of good news has been priced into this dividend stock.
But the really interesting thing is that the smaller advances by similarly large (if not larger) peers Enterprise and Enbridge obviously hasn’t led to as steep a decline in their yields. Enterprise is currently offering a distribution yield of roughly 6.4%, while Enbridge’s dividend yield is about 6%.
If you are looking to maximize the income your portfolio generates, these equally strong midstream alternatives will probably be a better choice. In fact, if you own Kinder Morgan specifically for the mix of yield and midstream exposure, you might even consider selling it and shifting into Enterprise or Enbridge.
There’s one more small consideration here, though. Enterprise has increased its distribution annually for 26 consecutive years; Enbridge’s streak is 29 years and counting. Kinder’s streak is pretty meager in comparison, and it follows a dividend cut in 2016. That cut happened to come about after management told investors in late 2015 to expect a dividend increase of as much as 10% in 2016. That’s the kind of thing that might lead conservative dividend investors to have trust issues.
It wouldn’t be fair to suggest that Kinder Morgan is a bad company. That’s hardly true, noting that even the 2016 dividend cut was made with the goal of best positioning the company for the future. However, after the swift price advance over the past year, it just doesn’t look like a particularly compelling income choice in the midstream sector when compared to other, equally large midstream companies.
That is confirmed by the company’s trailing enterprise value to earnings before interest, taxes, depreciation, and amortization ratio (EV/EBITDA) of 14.4, which is notably higher than 12.8 for Enbridge and 10.8 for Enterprise. Valuation wise, Kinder Morgan looks rather expensive after the big advance in share price. All in, most income-focused investors will probably be better off broadening their search in the midstream sector, with both Enbridge and Enterprise attractive alternatives to consider.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
