If you look Kinder Morgan (NYSE: KMI)This is likely due to a combination of its yield (a hefty 5.2%) and its size as one of the largest midstream companies in North America. But there’s a backstory here that you should understand before buying the stock. For some conservative income investors, Kinder Morgan will be a very difficult stock to justify a purchase.
What does KinderMorgan do?
Kinder Morgan is a midstream company, meaning it owns vital infrastructure such as energy pipelines, storage, transportation and processing assets. The energy industry cannot function without companies like Kinder Morgan, which helps move oil and natural gas from where they are produced to where they are used. As long as oil and natural gas remain important to the world, Kinder Morgan’s infrastructure will continue to be important to its energy sector customers.
The key here, though, is that Kinder Morgan is a toll taker. It charges fees for the use of its assets. The demand for energy is therefore much more important to the company’s operations than the price of the raw materials flowing through the system. Because demand for oil and natural gas tends to remain robust even when energy prices are low, Kinder Morgan’s cash flows tend to be fairly reliable over the energy cycle.
In this way, it supports the large 5.2% dividend yield it offers. That return is a multiple of what you would get from one S&P500 index fund (1.2%) and significantly higher than the average energy share (3.2%). The dividend has been increased annually since 2017. And the dividend is on top of an investment grade rated balance sheet. So far, the story here seems quite compelling.
The problem with Kinder Morgan as a dividend stock
It’s very clear that Kinder Morgan is a dividend stock. But that is also where a big problem arises. Normally, income investors like to buy companies that they believe will pay them regularly year in and year out. Essentially, investors want to own companies that are likely to continue paying their dividends through thick and thin. Kinder Morgan’s history is not particularly inspiring in this regard.
The story goes back to 2015, when management told investors on October 21: “Although we are at the beginning of our 2016 budget process, we currently expect to increase our 2016 declared dividend by 6 to 10 percent versus the 2015 declared dividend of $2.00 per share. We expect this range will provide us with the flexibility to meet our dividend and have surplus cash.”
On December 8, 2015, Kinder Morgan announced it would cut its dividend by 75% in 2016. The company made the right choice for the company as it essentially had to choose between its capital investment plans and the dividend due to an already high debt load. But dividend investors who took management at their word were likely let down.
And then there was 2020, when the company wanted to increase the dividend by as much as 25% to reach an annual run rate of $1.25 per share. That was the final part of a plan that was essentially designed to regain investor confidence. However, thanks to the uncertainty surrounding the corona pandemic, the company only increased the dividend by 5%. Management noted, “We remain committed to increasing the dividend to $1.25 annually.” It is now 2024 and the dividend still has not reached the target level.
Once again, Kinder Morgan probably made the right decision for its company. But investors who trusted the company to keep its dividend word were disappointed. That’s twice as many as this has happened in less than a decade. If confidence around the dividend is important to you, then Kinder Morgan will likely be a difficult stock for you to buy.
There are more reliable income options
Buying Kinder Morgan becomes even harder to justify when you consider that competitor Partners for business products (NYSE:EPD) has a return of 7.1%. That return is supported by an investment-grade balance sheet and a 26-year streak of distribution increases. In short, if you’re looking for a large and reliable revenue stream, you might be better off looking elsewhere in the midstream space.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
Is Kinder Morgan Stock a Buy? was originally published by The Motley Fool
