Source: Spectra Energy Partners
Kinder Morgan Inc's (KMI 1.73%) recent 75% reduction of its dividend has meant a hellish year for dividend investors.
KMI data by YCharts
With shares having fallen far worse than many of its blue chip midstream MLP peers such as Enterprise Products Partners (EPD 1.60%), Magellan Midstream Partners (MMP), and Spectra Energy Partners (SEP), value hungry income investors may be considering opening or adding to their positions in America's fallen dividend darling.
Find out three reasons why I think that is a bad idea and why Enterprise Products, Magellan Midstream, and Spectra Energy Partners are all likely to make far superior long-term income investments over the next five to ten years.
Rare case of higher quality AND higher yield
| Company/MLP | Yield | 2015 Distribution Coverage Ratio | Payout Growth Guidance |
| Kinder Morgan | 3.4% | 4.2 | NA |
| Enterprise Products Partners | 7.8% | 1.3 | 5.2% in 2016 |
| Magellan Midstream Partners | 5.3% | 1.2 | 10% in 2016 "at least" 8% in 2017 |
| Spectra Energy Partners | 6.0% | 1.2 | 7.3% CAGR through 2018 |
Sources: earnings results, earnings presentations, guidance presentations
Note Kinder's 2015 DCR takes into account the reduced dividend and Magellan's DCR factor's in 10% distribution growth that management is currently guiding for.
The point of owning midstream MLPs is for the distributions and investors need to focus on three aspects of the payout: yield, long-term sustainability, and long-term, realistic growth prospects.
In this case Kinder Morgan proves itself far inferior in all aspects to its peers, with a far lower yield and uncertain payout growth prospects. Even its enormous coverage ratio, while seemingly the largest, really isn't since management is only guiding for $300 million in excess DCF for 2016 once dividends and capital spending are taken into account.
Also keep in mind that this projected excess DCF is based on projected average 2016 oil and gas prices that are already proving overly optimistic. Should energy prices continue falling or even just remain at current prices, Kinder's excess DCF cushion -- and any potential prospects for short-term dividend increases -- will fall right along with them.
Superior payout growth guidance backed up by strong backlogs
When it comes to long-term distribution growth it's vital that investors not just take management's word for it, but ask themselves "does this MLP have a large enough short-term to medium-term project backlog to sustainably grow the payout this quickly?"
Enterprise Products Partners, Magellan Midstream, and Spectra Energy Partners all have stable or growing backlogs that are sufficient to provide a growth catalyst that is likely to keep their payouts growing for many years to come.
Kinder Morgan on the other hand has been forced to slash its once mighty $22 billion backlog by 17% or $3.8 billion in just the last six months.
Management has said that it expects the backlog to continue shrinking as it focuses on only its most potentially profitable projects. Don't get me wrong, this "high-grading" of Kinder's backlog is necessary because when it comes to profitability Kinder is once again woefully inferior compared to its blue chip peers.
Weak balance sheet and poor profitably
| Metric | Kinder Morgan | Enterprise Products Partners | Magellan Midstream Partners | Spectra Energy Partners |
| Debt/EBITDA (Leverage) Ratio | 5.6 | 4.5 | 2.9 | 3.6 |
| Operating Income/Interest (Interest Coverage) Ratio | 1.28 | 3.68 | 7.2 | 5.33 |
| Average Debt Cost | 5.1% | 4.40% | 4.30% | 3.9% |
| Weighted Average Cost of Capital (WACC) | 3.14% | 7.06% | 7.23% | 6.53% |
| Return on Invested Capital | 2.09% | 8.51% | 19.87% | 7.41% |
| Return on New Investment (WACC-ROIC) | (1.05%) | 1.45% | 12.64% | 0.88% |
Sources: earnings releases, earnings presentations, Morningstar, Gurufocus
Kinder Morgan's highly leveraged balance sheet, and the risk of a credit downgrade that would have forced it to raise additional debt in the junk bond market -- was the primary cause of its dividend cut and share price crash.
Unfortunately, while management is working on reducing its leverage ratio, even with new projects coming online in 2016 Kinder expects its leverage ratio at the end of 2016 to be nearly unchanged at 5.5.
This high debt load means that not only is servicing its debt more difficult, but the company also runs the risk that refinancing its existing debt will grow in the future. This would increase its cost of capital which could further harm its ability to grow profitably in the future.
In comparison Enterprise, Magellan, and Spectra Energy Partners' leverage, and interest coverage ratios exhibit clear signs of far more conservative use of debt in the past. This helps to keep their cost of capital low and allows positive return on new investment that is likely to mean continued DCF, and sustainable payout growth, for the foreseeable future.
Bottom line
Kinder Morgan may finally be on the right track when it comes to growing in a world of low energy prices and by no means do I recommend selling shares you already own.
However, when it comes to investing new money Kinder's: lower yield, poorer long-term growth prospects, much weaker balance sheet, and far worse profitability means that I must recommend long-term dividend investors choose Enterprise Products Partners, Magellan Midstream, and Spectra Energy Partners over Kinder at this time.
