Better Buy: Brookfield Infrastructure Partners LP vs. Kinder Morgan, Inc.

Kinder Morgan, Inc. (NYSE: KMI) is an operationally well-run midstream energy company, but it disappointed investors just a few years ago with a 75% dividend cut. Although the dividend is scheduled to jump by 25% a year between 2018 and 2020, it just sold a major growth project that will make supporting its long-term dividend goals more difficult. Here's why you should be considering Brookfield Infrastructure Partners LP (NYSE: BIP) instead.

1. Yield and dividend growth

Right now Kinder Morgan's yield is around 4.5%. Brookfield Infrastructure's yield is roughly 4.6%. If you are looking to generate current income, the two are essentially a wash. However, Kinder Morgan is expecting its dividend to grow materially between 2018 and 2020, ending the period at $1.25 per share per year, up from $0.50 in 2017.

Using today's stock price, that would mean a dividend yield of nearly 7%. Brookfield targets annual distribution growth of 5% to 9%, but has grown the payout at an annualized 11% since its inception in 2008 with no distribution cuts along the way. Assuming it hits the high end of its growth target, the distribution in 2020 would lead to a yield of roughly 5.5% using today's unit price. That appears to give the edge to Kinder Morgan, but not so fast...

2. About that dividend cut

You can't look at Kinder Morgan's dividend growth plans without taking a step back and looking at the company's 2016 dividend cut. That 75% haircut was a huge hit to income investors and it came just a few months after the company was projecting a dividend increase for 2016. Moreover, even after the current round of planned dividend hikes, the payment will still be nearly 40% below the level prior to the cut.

Trust in management's dividend projections should be a big issue for Kinder Morgan investors and anyone looking at the company today. Brookfield, meanwhile, has increased its dividend annually since its 2008 IPO. It has not only managed to live up to its promise of 5% to 9% distribution growth, but to exceed it, with 11% annualized distribution growth.

The trust issue is big here because Kinder Morgan just inked a deal to sell a major growth project in Canada due to pushback from residents, environmentalists, and local government. That single project accounted for around 40% of its project backlog. Losing the long-term cash flows associated with that project adds some uncertainty to its ability to support its dividend growth plans over the long term, even though it continues to back its current dividend growth projections.

3. A little bit about leverage

Kinder Morgan's 2016 dividend cut was partially driven by a difficult market environment for midstream companies and partly because it has historically made relatively aggressive use of leverage. When times got tough, it chose to keep spending on growth over continuing to reward shareholders for their investment in the company. Although it has paid down a material amount of debt since the dividend cut took place, the debt-to-EBITDA ratio still stands at around 6.2. The debt-to-equity ratio is roughly 1.1.

For comparison, Brookfield's debt-to-EBITDA ratio is a much lower 4.2, and its debt-to-equity ratios stands at 0.56. While Brookfield is less leveraged today, it wasn't always that way -- which is, perhaps, the more interesting story here. While Kinder Morgan continues to use notable leverage, Brookfield is trending toward lower levels of leverage as it grows. That's a much more comforting story if you care about dividend sustainability.

4. Diversification

Another interesting difference here is that both Kinder Morgan and Brookfield are infrastructure plays, but they go about investing very differently. Kinder Morgan owns midstream assets and only midstream assets. Brookfield's portfolio includes utilities (about 31% of its operating assets), transportation like ports and toll roads (43%), midstream infrastructure (19%), and telecom infrastructure (around 7%).

When you step back and look at Kinder's problems in Canada you can start to appreciate Brookfield's diversification a lot more. Simplifying things a little bit, Kinder only has one avenue for growth: building and buying midstream infrastructure. Brookfield can shift gears among its four main asset types as it seeks to expand. Problems in one area aren't likely to derail the broader partnership. And since it can put capital toward the most advantageous sector at any given time, it can also more easily hunt for bargains.

5. Diversification, part II

Just being in more segments of the infrastructure space isn't the only way that Brookfield differentiates itself with regard to diversification. Kinder Morgan is focused on North America. That's not a bad thing, since increasing oil and natural gas production are leading to increasing demand for the infrastructure used to move these fuels and their byproducts around.

However, Brookfield's investments span the globe. That includes North America, South America, Europe, and Asia. So not only do you gain exposure to more types of infrastructure, but you also gain exposure to more regions of the world. That materially expands Brookfield's ability to find value-priced acquisitions.

Investor takeaway

Kinder Morgan runs its operations well, but its dividend history is spotty. The pipeline company's ability to support its big dividend growth plans, meanwhile, is again uncertain because of its historical use of leverage compounded by the sale of a large but troubled growth project. Even though it's likely that Kinder will find new investments to make up for the asset it's selling, based on Kinder's dividend history, income investors should probably take a wait-and-see approach.

Brookfield Infrastructure Partners, on the other hand, has a more diversified portfolio and lower leverage. It isn't facing any material headwinds to its growth plans right now. And although it's calling for slower distribution growth than Kinder Morgan, it's likely a better option for investors seeking a reliable and growing income stream today.

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