If you are looking for an intermediate giant to add to your portfolio, then Kinder Morgan (NYSE: KMI) and Enterprise Product Partners (NYSE: EPD) must be on your shortlist. But which is the best option is a complicated question. Here are a few things to consider when looking at these two high-yielding products.
1. Structure matters
Kinder Morgan and Enterprise both focus on owning the pipelines, transportation, processing and storage assets that help transport oil, natural gas and the products they are processed into around the world. They also favor toll contracts, in which they are paid for the use of the asset, largely eliminating the risk of fluctuating commodity prices from the image. However, their ways of doing things are entirely different.
Kinder Morgan is structured like a regular company, so there isn’t much to say there. But Enterprise is a Master Limited Partnership (MLP). It is a unique corporate structure that treats unitholders as if they were the direct owners of the assets. This allows for some tax benefits, but also increases the complexity of owning Enterprise. For example, you will have to process a K1 form at tax time and you really should not own the units of a tax-advantaged retirement account. In fact, it’s probably a good idea to consult a tax professional if you have an MLP. If you like to keep it simple, Kinder Morgan is the best option.
2. Dividends and distributions
Kinder Morgan pays regular dividends while Enterprise Products Partners spits out distributions. There are different tax consequences associated with each, but there is an even bigger difference here that investors should know: Kinder Morgan cut its dividend by 75% in 2016 while Enterprise has a series of annual payout increases. 24 years to its credit, making it a year away from dividend aristocrat status.
To be fair, Kinder Morgan has started raising its dividend again. But the backstory here is important, as just months before announcing this huge cut in 2016, management was telling investors to expect an increase of up to 10%. It should also be noted that in 2020 the dividend was increased by 5% while management had telegraphed for several years an increase of 25%. Either way, management has likely made the right choice for the company, but investors might wonder if they can trust Kinder Morgan to keep his word. More conservative income-oriented investors will likely prefer Enterprise.
3. A changing world
If you look at this pair of middle names, you need to make sure that you understand the energy transition that is taking shape today. Oil and natural gas are likely to remain important for years to come, but clean energy is the long-term future. On this point, Kinder Morgan recently announced plans to start looking for ways to use its cash cow oil and natural gas assets to start expanding into areas that will benefit from the switch to clean energy. . It’s a good start, even if it’s really just a start. Enterprise has not undertaken a similar effort. And while he’s been looking for ways to clean up his environmental footprint, it’s not the same as investing in space. Neither name is a clean energy game, but it looks like Kinder Morgan is getting a head start on Enterprise when it comes to evolving its model with the world.
4. Tall and growing
Another interesting thing to consider as the world moves towards clean energy is that intermediary players have historically grown by building new assets. If many new assets are not needed, which looks likely in the future, growth will likely come from acquisitions. Kinder Morgan and Enterprise are both large and diverse enough to be major players in a consolidating industry. However, Enterprise’s financial debt to EBITDA ratio is approximately 4.1 times, giving it a lot of leeway to close deals. Kinder Morgan’s debt-to-EBITDA ratio has historically been at the high end of the industry. The figure was about 5.3 times at the end of the first quarter of 2021, which is a marked improvement over the figure of about 9 times the dividend cut.
Yet Kinder Morgan has more leverage on its balance sheet than Enterprise and this puts it at a disadvantage when it comes to acquisitions. Given its improving leverage position, Kinder Morgan will likely remain a major player if consolidation becomes a theme, but it may end up being more limited in what it can do. Conservative types will likely want to keep a close watch on Kinder Morgan debt levels.
A complicated answer
When consulting with Kinder Morgan and enterprise product partners, there are other things that you should clearly consider besides those listed here. However, these four points are quite important that should be a priority, and the points to remember could make your decision easier – or more difficult. For investors keen to put past transgressions aside and look to the future, Kinder Morgan’s clean energy move could make this the winner. But that’s only if you can accept the higher leverage, which might make growth harder to sustain. Overall, however, conservative types looking for a reliable income will likely find the Business to be the better choice. This comes with a caveat, however, given that you need to be comfortable with the MLP structure.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.