Yahoo Finance Better Buy: Enbridge Inc vs. Kinder Morgan, Inc.
Kinder Morgan (NYSE: KMI) and Enbridge (NYSE: ENB) are two of the behemoths in the energy infrastructure space. Enbridge is the largest overall, thanks to its mammoth oil pipeline business. Meanwhile, Kinder Morgan is the industry leader in several categories, including natural gas where it operates the largest pipeline system on the continent.
Because of their enormous size and the stable cash flow they generate, either company would make an excellent core holding. That said, for investors looking for the better buy right now, Kinder Morgan stands out. Here's why it has the edge over Enbridge.
Image source: Getty Images.
A quick look under the hood
One of the most important considerations when choosing between two investment options is the strength of their financial profiles. As the following table shows, these energy infrastructure giants match up fairly well.
Company | Credit Rating | Debt to Adjusted EBITDA | Projected 2017 Dividend Payout Ratio | % of Cash Flow Fee-Based or Regulated |
|---|---|---|---|---|
Enbridge | BBB+/BBB/Baa2 | 5.5 times | 2.0 times | 96% |
Kinder Morgan | BBB-/Baa3 | 5.1 times | 4.0 times | 91% |
Data source: Kinder Morgan and Enbridge.
While Enbridge boasts a higher credit rating, Kinder Morgan's financial metrics are slightly better since it has lower leverage and dividend payout ratios. That hasn't always been the case since Kinder Morgan's leverage ballooned to nearly 5.9 times in late 2015 due to the deepening oil market downturn. As a result, the company slashed its dividend and used that money, along with asset sales, to shore up its financial situation. So, it's now on a stronger footing than Enbridge. It's worth noting, though, that thanks to in-process growth projects, Enbridge expects its leverage ratio to fall to 4.3 times by 2019, which is below its 5.0 times target.
A look at what lies ahead
Not only do these companies have healthy balance sheets, but both expect to grow cash flow and their dividends at a rapid pace over the next few years.
Pipeline Stock | Current Yield | Dividend Growth Forecast | Projected 2020 Yield | Average Dividend Coverage Ratio |
|---|---|---|---|---|
Kinder Morgan | 2.9% | 60% in 2018 and 25% in both 2019 and 2020 | 7.1% | More than 2.0 times |
Enbridge | 4.9% | 10% to 12% through 2024 | 6.8% | Slightly less than 2.0 times |
Data source: Kinder Morgan and Enbridge. Projected 2020 yield assumes high-end dividend growth for Enbridge.
As that table shows, in the near term, Kinder Morgan expects to grow its dividend at a much faster rate than Enbridge. That's partially because it anticipates increasing its payout ratio from 25% to 50% of cash flow now that its balance sheet is on firmer footing. However, Kinder Morgan also has nearly $12 billion of expansion projects that should increase its annual fee-based earnings by more than $1.5 billion by 2021, or about 20% above 2017's level. Meanwhile, the company has other projects in the pipeline that could bolster its near-term growth prospects.
That said, Enbridge has an even-larger expansion backlog at 31 billion Canadian dollars ($24.3 billion). Those projects should supply it with nearly CA$4 billion ($3.1 billion) of incremental earnings by 2020, which positions the company to deliver 12% to 14% compound annual cash flow growth over that same time frame. That gives it the fuel to deliver double-digit dividend growth over the next several years. But even with that growth, investors could earn a higher yield in 2020 if they bought Kinder Morgan instead of Enbridge.
Image source: Getty Images.
Comparing the values
One reason investors could lock in a higher yield for 2020 with Kinder Morgan is that it currently sells for a much cheaper valuation than Enbridge.
Company | Price to Distributable Cash Flow | Enterprise Value to EBITDA |
|---|---|---|
Enbridge | 12.3 | 16.5 |
Kinder Morgan | 8.8 | 12.9 |
Data source: Kinder Morgan and Enbridge.
That's a dirt-cheap price not only compared to Enbridge but pipeline stocks in general since most sell for a mid-teens multiple of cash flow. In fact, it wasn't all that long ago that Kinder Morgan sold for more than 20 times cash flow.
One potential reason Kinder Morgan sells for a much lower price is due to concerns about its ability to build its largest growth project, the Trans Mountain Pipeline expansion project under development by its Kinder Morgan Canada Limited (TSX: KML) subsidiary. Kinder Morgan Canada warned last quarter that the permitting for the pipeline has been running behind schedule, which could cause as much as a nine-month construction delay. While a delay might impact Kinder Morgan's ability to increase the dividend in 2020, management doesn't think investors should be too worried about the company's ability to build this pipeline.
Furthermore, Enbridge's largest growth project, the Line 3 Replacement, has faced intense opposition in Minnesota. While the company expects to receive the necessary approvals, it could still hit a roadblock. If that happens, it might derail Enbridge's dividend growth plans.
Both great options but one is just too cheap to ignore
In my opinion, either pipeline stock would be an excellent choice for income-focused investors since both have the financial strength and expansion projects to deliver exceptional dividend growth over the next few years. That said, Kinder Morgan is the better stock to buy right now because it is selling for an absurdly low price. At some point, the market should come to its senses and reward Kinder Morgan with a higher valuation to reflect its progress over the past two years. When you add that appreciation potential with a rapidly growing dividend, Kinder Morgan could deliver market-smashing returns over the coming years.
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Matthew DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Enbridge and Kinder Morgan. The Motley Fool has a disclosure policy.
