If you look at the midstream giant Kinder Morgan (NYSE: KMI) On its own, it looks like an attractive dividend stock today. The return is around 4%, which is higher than the 3.3% return of the average energy company based on the Energy Select Sector SPDR ETF as a sector proxy. And the midstream company’s dividend has increased every year since 2018.
But don’t rush to buy Kinder Morgan before you’ve dug a little deeper into the midstream niche. This is why.
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Kinder Morgan is a midstream company, meaning it owns energy infrastructure such as pipelines and storage and transportation assets. The majority of revenue comes from fees customers pay for the use of these essential assets.
Therefore, it is usually fairly well protected against the volatile price fluctuations of oil and natural gas. The above-average 4% yield is also well supported, with the company’s distributable cash flow covering the Q3 2024 dividend at a solid ratio of 1.7.
So there is no particular reason to believe that the dividend is at any risk of being cut. In fact, it is much more likely to continue to grow over time. For some investors, that 4% yield will be very tempting, especially 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 continue to own it, but don’t yet. There is more to this story.
The share has risen considerably in the past year, by more than 60%! That’s a huge increase for what is usually a pretty boring niche of the energy sector. In fact, this is more than double the increase versus some of the company’s closest competitors Enbridge (NYSE: ENB) And Partners for business products (NYSE:EPD). That 4% yield is actually about 40% below the stock’s highest return over the past year. There’s a lot of good news priced into this dividend stock.
But the really interesting thing is that the smaller advances from equally large (if not larger) peers Enterprise and Enbridge clearly haven’t led to as steep a decline in their returns. Enterprise currently offers a distribution yield of about 6.4%, while Enbridge’s dividend yield is about 6%.
If you want to maximize the income your portfolio generates, these equally strong midstream alternatives are probably a better choice. If you own Kinder Morgan specifically for its mix of returns and midstream exposure, you might even consider selling it and switching to Enterprise or Enbridge.
However, there is one more small consideration here. Enterprise has increased its distribution annually for 26 consecutive years; Enbridge’s streak is 29 years and counting. Kinder’s streak is pretty paltry by comparison and follows a dividend cut in 2016. That cut happened to happen after management told investors in late 2015 to expect a dividend increase of as much as 10% in 2016. can cause conservative dividend investors to have confidence issues.
It wouldn’t be fair to suggest that Kinder Morgan is a bad company. That’s hardly true, as even the 2016 dividend cut was implemented with the aim of best positioning the company for the future. However, after the rapid price increases over the past year, it does not appear to be a particularly attractive income choice in the midstream sector compared to other similarly sized midstream companies.
This is borne out by the company’s trailing enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) of 14.4, which is significantly higher than 12.8 for Enbridge and 10.8 for Enterprise. In terms of valuation, Kinder Morgan looks quite expensive after the big rise in its stock price. Overall, most income-oriented investors will likely be better off broadening their search to the midstream sector, with both Enbridge and Enterprise having attractive alternatives to consider.
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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.
Kinder Morgan: Buy, Sell or Hold? was originally published by The Motley Fool
