Better Buy: Brookfield Infrastructure Partners LP vs. Kinder Morgan

Man stands in front of a chalkboard with a scales drawn on it.

Energy giant Kinder Morgan Inc (NYSE: KMI) and global diversified infrastructure partnership Brookfield Infrastructure Partners L.P. (NYSE: BIP) have seen their stock prices move in opposite directions over the past few years. Since mid-2015, Kinder Morgan's stock price has lost more than half its value, while Brookfield Infrastructure investors have enjoyed 65% gains. When dividends are added in, Brookfield Infrastructure shareholders have a total return above 90%, more than double the very strong 42% gain by the S&P 500 over the same period.

But what about looking forward? Kinder Morgan is in much better shape than it was three years ago, and management has a plan in place that's already starting to deliver growth. And after having to cut it by 75% a couple of years ago, the company is about to pump up its dividend substantially.

On the other hand, can Brookfield Infrastructure continue its run of success that has seen investors paid so handsomely? In short, I think it can, but that's no guarantee that it's set to outperform Kinder Morgan. Let's take a closer look at both companies and figure out which one is the better buy.

Kinder Morgan is cheap, has its house in order, and growth is coming

Rewind a few years, and Kinder Morgan was a dividend darling. Furthermore, many investors -- myself included -- were under the (since proven false) assumption that the energy giant would have little problem being able to continue funding its growth initiatives with debt and maintain its dividend, which at one point was yielding well above 6%. Well, credit rating agencies and lenders had different ideas, and the threat of a downgrade that would have potentially put the company in big trouble led to a 75% cut in the company's payout.

Coming back to the present, and debt is down about 15% from the peak, cash on the balance sheet is up, and operating cash flows are set to increase as growth projects start to come online. Over the past two years, Kinder Morgan has paid down almost $6 billion in debt, sold off partial stakes in several of its assets, and entered into multiple partnerships and joint ventures to help accelerate growth investments.

Of course, the downside of asset sales and partnerships is that the company doesn't completely control its own destiny. But the upside is that Kinder Morgan can still pursue growth across multiple opportunities, without having to take on as much debt or issue as much equity to pay for it. There is some risk with this strategy, and it also reduces the potential upside profits, but it also reduces the downside risk for the company. Since it was a too-aggressive growth strategy that resulted in the 50% stock price beatdown and 75% dividend haircut, this is something shareholders should be very happy to see.

It's already set to pay off. In 2018, Kinder Morgan's dividend is set to increase 60%, which would generate a 4.5% yield at recent prices, and the company intends to increase the payout by 25% in both 2019 and 2020. With shares trading for less than 10 times distributable cash flows -- compared to a mid-teens average for the sector -- Kinder Morgan is incredibly attractive right now.

Making the case for Brookfield Infrastructure

To start, Brookfield Infrastructure Partners isn't anywhere near as inexpensive as Kinder Morgan. As a master limited partnership , there are some differences in how to value the company, so bear with me while I lay out the case.

To start, its dividend yield is 3.9% at recent prices, so Kinder Morgan is on track to be a slightly better income stock based on management's projections for dividend growth over the next three years. Second, based on funds from operations (FFO), a metric that is generally considered one of the best to evaluate MLPs, Brookfield Infrastructure is on the higher end of its valuation over the past few years, trading for above nine times trailing FFO. This compares to price-to-FFO of around eight times in 2016 and 2015. However, it has also seen its price-to-FFO in the low teens in the past, so it's not necessarily crazy-expensive, either. Nonetheless, it's not as cheap as Kinder Morgan.

But if we move beyond price, there are two things that make Brookfield Infrastructure a preferable business: diversification and a better long-term track record of execution.

Brookfield Infrastructure's reach extends far beyond energy and North America. The partnership owns assets in telecommunications, utilities including water and energy (both natural gas and electric transmission), and transportation including toll roads and ports, in more than a dozen countries on multiple continents. This more diversified business has certainly proved an asset, since its energy exposure didn't cause any major harm during the oil price collapse. To the contrary, its ability to steadily invest in adding assets across sectors with strong, steady cash flows, and minimal impact from commodity prices or economic conditions is a primary reason why Brookfield Infrastructure has increased funds from operations -- and its distribution -- every year since going public.

The other part of its success is management's steady hand at capital allocation. It has used a substantial amount of debt and new equity issuance to grow, but the cost of capital has been reasonable, and new assets have almost always quickly added incremental per-share cash flow.

Here's why Brookfield Infrastructure comes out ahead

At the end of the day, an investment in either stock is likely to work out quite well over the next five years. But from where I stand, Brookfield Infrastructure comes out ahead as the one I'd rather own for the very long term.

Kinder Morgan is cheap and also likely to be the better dividend growth stock over the next few years. It also has solid growth prospects, as natural gas demand in North America increases and our ability to export it to high-demand global markets grows, too.

But Brookfield Infrastructure's prospects are just bigger and longer-term than Kinder Morgan's, while its downside risks are also fewer. Over the next several decades, global infrastructure investments are expected to exceed $3 trillion annually, and less and less of that money will flow to fossil fuels.

As the world's middle class grows and more people live in or near cities, investments in transportation, water, and telecommunications infrastructure will increase. Brookfield Infrastructure already participates in all of these segments and is set to ride out this growth for decades to come. It's much harder to predict Kinder Morgan's prospects when we measure it in decades. That's enough to make Brookfield Infrastructure the better buy.

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Jason Hall owns shares of Brookfield Infrastructure Partners and Kinder Morgan. The Motley Fool owns shares of and recommends 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.

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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