If you are looking at Kinder Morgan (NYSE: KMI) , it's probably for some mixture of its yield, which is a hefty 5.2%, and its scale as one of the largest midstream companies in North America. But there's a backstory here that you need to understand before you buy the stock. For some conservative income investors, Kinder Morgan will be a very hard stock to justify buying.
What does Kinder Morgan do?
Kinder Morgan is a midstream company, which means it owns vital infrastructure like energy pipelines , storage, transportation, and processing assets. The energy sector can't operate without companies like Kinder Morgan, since it helps move oil and natural gas from where they get produced to where they get used. As long as oil and natural gas remain important to the world, Kinder Morgan's infrastructure will remain important to its energy industry customers.
Image source: Getty Images.
The key here, however, is that Kinder Morgan is a toll taker. It charges fees for the use of its assets. Thus, demand for energy is far more important to the company's business than the price of the commodities flowing through its system. Since 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 through the energy cycle.
That's how it supports the large 5.2% dividend yield it offers. That yield is multiples of what you'd get from an S&P 500 index fund (1.2%) and notably higher than the average energy stock (3.2%). The dividend has been increased annually since 2017. And the dividend sits atop an investment grade rated balance sheet . So far, the story here seems pretty attractive.
The problem with Kinder Morgan as a dividend stock
Very clearly, Kinder Morgan is a dividend stock. But that's also where a big problem arises. Usually, 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 keep paying their dividend through thick and thin. Kinder Morgan's history isn't particularly inspiring on this front.
The story goes back to 2015, when management told investors on Oct. 21: "While we are at the beginning of our budget process for 2016, we currently expect to increase our declared dividend for 2016 by 6 to 10 percent over the 2015 declared dividend of $2.00 per share. We expect this range will provide the flexibility for us to meet our dividend and have excess cash coverage."
On Dec. 8, 2015, Kinder Morgan announced that it was going to cut the dividend by 75% in 2016. The company made the right choice for the business, since it basically had to choose between its capital investment plans and the dividend because of an already elevated debt load. But dividend investors who took management at its word were likely let down.
And then there was 2020, when the company was slated to increase the dividend by a huge 25% to get to an annual run rate of $1.25 per share. That was the final part of a plan that was, basically, designed to earn back investor trust. Thanks to the uncertainty surrounding the coronavirus pandemic, however, the company only increased the dividend by 5%. Management noted, "We remain committed to increasing the dividend to $1.25 annualized." It is now 2024 and the dividend still hasn't hit the targeted level.
Again, Kinder Morgan probably made the right decision for its business. But investors who trusted the company to live up to its word on the dividend were let down. That's two times that this has happened in less than a decade. If trust around the dividend is important to you then Kinder Morgan will probably be a tough stock for you to buy.
There are more reliable income options out there
Buying Kinder Morgan becomes even more difficult to justify when you consider that competitor Enterprise Products Partners (NYSE: EPD) has a 7.1% yield. That yield is backed by an investment grade rated balance sheet and a 26-year streak of distribution increases. Basically, if you are looking for a large and reliable income 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 has positions in and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy .
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