Better Buy: Brookfield Infrastructure Partners vs. Kinder Morgan

Dividends investors looking for reliable income stocks might be attracted to Brookfield Infrastructure Partners (NYSE: BIP) and Kinder Morgan (NYSE: KMI) for their 4%-plus yields. That's understandable in a world where the S&P 500 Index yields closer to 2%. But don't stop at the yield -- there's a lot more to understand about these two infrastructure players. Here's a primer on what you need to know to decide if one of these two names belongs in your portfolio today.

Building it back

Kinder Morgan is one of North America's largest midstream energy companies, owning a massive and sprawling collection of pipelines, storage, ports, and processing facilities. With a $46 billion market cap, it stands toe to toe with some of the industry's biggest players. And it has a long history of capably operating its assets and managing its portfolio through acquisitions, dispositions, and ground-up construction. 

A man Looking down over an energy processing facility

Image source: Getty Images

Since debt to EBITDA rose above 9 times in 2016 and 2017, Kinder Morgan has worked to push its leverage ratios down to more reasonable levels. Debt to EBITDA is currently around 5.25 times, still notably above the ratios of its most conservative peers but also much better than it was just a few years ago. Management has, indeed, made great strides.

Kinder's growth plans, meanwhile, include nearly $6 billion worth of capital projects. As those projects get completed through 2023, they will start to add to cash flow. And that means a growing top and bottom line, even while the company strengthens its balance sheet.

What may be most attractive about Kinder today, however, is its string of massive dividend increases. It hiked its payout 60% in 2018 and another 25% in 2019. The stated target is an additional 25% increase in 2020. Don't get too excited, however -- after 2020 dividend growth is likely to be more subdued. Most peers of Kinder's size range between the low-single-digits to about 10% annual dividend increases. In fact, the reason for the massive dividend growth is that Kinder is building back from a 75% dividend cut in 2016.

Conservative investors should take note of this, because just a couple of months before the cut Kinder's management was talking about a 10% dividend increase. Kinder isn't just building back its dividend, it's also building back trust with investors. To be fair, it is doing a very good job on that front, but there are options in this space that haven't let investors down in the same way.

Chugging along

Brookfield Infrastructure Partners differs from Kinder in some key ways. But before digging into those, one key highlight is that distributions have been increased each year for 12 consecutive years. The annualized hike over the past decade was an impressive 12%, even though the partnership only targets 5% to 9% growth per year. If you are an income investor, Brookfield Infrastructure Partners hold up well against Kinder Morgan when you look past the last few years of dividend hikes.

But these two are not interchangeable. For starters, Brookfield is a master limited partnership controlled by giant Canadian infrastructure specialist Brookfield Asset Management. That lets Brookfield Infrastructure Partners punch well above its size (it has a roughly $14 billion market cap), but means there are additional tax issues for investors to consider. That includes having to figure out a K-1 form, and the fact that partnerships are best owned outside of tax-advantaged retirement accounts

There's also a big difference in Brookfield Infrastructure Partners' portfolio. Like Kinder, it has exposure to midstream assets, such as pipelines. And it has plans to keep expanding in the space as well. But its portfolio is much broader than that, including things like electric power generation, railways, and toll roads, among others. Moreover, its portfolio is global in nature, with assets spread across the globe. Only about 30% of its cash flow comes from North America.

Like Kinder, Brookfield has a strong history of managing its portfolio of infrastructure assets very well. That includes buying when assets are cheap and then selling when they are expensive. Brookfield believes it can increase its funds from operations (comparable to earnings for an industrial company) in the 6%-to-9% range over the next few years through a combination of contractual price increases, process improvements, and capital investments (it has $2 billion worth of projects to work on). That, in turn, should allow it to keep increasing its distribution.

KMI Chart

KMI data by YCharts

For conservative investors who prize consistency and diversification, Brookfield Infrastructure Partners has an edge over Kinder Morgan. Unfortunately, Brookfield's unit price is near all-time highs, and its distribution yield is near all-time lows. Using yield as a rough valuation tool, it simply doesn't look particularly cheap today. For reference, Kinder Morgan's dividend cut led to a massive stock price decline from which the shares have yet to fully recover -- it is still down 50% from its late 2015 peak. So for value-conscious investors, Kinder would have a big edge here.

What does all this mean?

The end of this tale isn't a solid yes for either Kinder Morgan or Brookfield Infrastructure Partners. Both are well run, but Kinder clearly let income investors down in a big way. It looks like a better value than Brookfield, but there are other midstream partnerships with better records of consistently rewarding investors. Brookfield, meanwhile, is far more diversified, and has a much better distribution history. But a historically low yield hints that the price is high right now. While for many reasons it's likely a better option than Kinder Morgan, it's still probably best left on your watch list right now.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Brookfield Asset Management and Kinder Morgan. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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