I invest almost exclusively in dividend stocks, with the intention of building an income stream that I can turn on one day when I retire. While this isn’t a hard and fast rule, I don’t like owning companies that cut their dividends. But what I really don’t like are companies that go back on a promise, especially when that promise is about the dividend.
That’s why I will never buy Kinder Morgan (NYSE: KMI) despite the attractive dividend yield of 6.2%.
Kinder Morgan is not a bad company
Kinder Morgan is one of the largest midstream energy companies in North America. It owns a collection of energy infrastructure assets that are difficult, if not impossible, to replace or relocate. And it is large enough to act as an industrial consolidator, which is important today because there are limited opportunities for land development. From this perspective, there is nothing wrong with Kinder Morgan.
The company is also financially strong, with an investment-grade rated balance sheet. And in terms of dividends, Kinder Morgan has been regularly increasing its dividend every year lately. The dividend was covered 1.8 times by distributable cash flow in 2023, which is very good.
The truth is, if you just look at the company as it stands now, there are reasons why investors would find it attractive. But I value dividend consistency, so the company’s dividend cut in 2016 is something that gives me pause. However, the problem is much bigger than it seems at first glance.
No one likes a budget cut, but a broken promise is worse
I can handle a dividend cut if there is a good reason for the board to make such a decision, for example a spin-off or asset sale that significantly reduces revenues and profits, or even an unexpected bad event such as a global pandemic. But what I don’t like is when a company makes a bold promise that it narrowly misses.
In the case of Kinder Morgan, that promise was made on October 21, 2015, when management stated: “as we begin our 2016 budget process, we currently expect to increase our 2016 declared dividend by 6 to 10 percent .” on the $2.00 per share dividend announced in 2015.” Less than two months later, on December 8, 2015, the company announced “that its Board of Directors has approved a plan under which it expects to pay quarterly dividends of $0.125 per share share to its common shareholders ($0.50 per year).” Instead of the promised 10% increase, investors received a 75% dividend cut.
To be fair, the energy sector was in bad shape at the time and Kinder Morgan had to choose between growth-oriented capital investments or paying dividends. It was the right long-term choice for the company. But if you’re a dividend investor like me, you’ll probably be left with trust issues.
Unfortunately, Kinder Morgan did it again in 2020. The company had an aggressive dividend growth plan in place when the dividend started rising again in 2018. That plan included a 25% dividend increase in 2020, but due to the pandemic the board opted for 5% instead. Management noted, “The board remains committed to increasing the dividend to $1.25 annually, as we expected, under very different circumstances, in 2017.” As of the first quarter of 2024, the annualized dividend was $1.13 per share, still well below the 2020 target. Once again, the company probably made the right choice given the uncertainty of the coronavirus pandemic, but investors who acquired the company on his word were abandoned once more.
There are other options out there
If only Kinder Morgan hadn’t delivered on its promise in 2020, I wouldn’t have minded at all. But add that to the 2016 dividend cut and I can’t look at the company the same way anymore.
Instead, I own his pear Enbridge (NYSE: ENB), which has increased its dividend for 29 years in a row. You could also watch Partners for business products (NYSE:EPD), which has 25 years of distribution increases behind it. And here’s the really interesting part: Enbridge and Enterprise both have higher returns than Kinder Morgan today!
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool holds and recommends positions in Enbridge and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
1 Stock I Wouldn’t Touch With a 10-Foot Pole was originally published by The Motley Fool
