Better Buy: Kinder Morgan Canada vs. TransCanada Corporation

Kinder Morgan Canada (NASDAQOTH: KMLGF) recently jettisoned a growth project that was seeing major pushback from local residents and governments in Canada. TransCanada (NYSE: TRP) is still trying to build the Keystone XL pipeline, despite ongoing headwinds from local residents and governments in the United States. With both companies making headlines for their pipeline troubles, but taking different paths, is one a better buy than the other? Here are some key points to consider when making this call.

1. Size matters

One of the first things you should notice here is that Kinder Morgan Canada, with a market cap of just $400 million, is tiny compared with TransCanada -- a $42 billion midstream energy giant. But Kinder Morgan Canada isn't some upstart looking to take on industry Goliaths. It was created by Kinder Morgan Inc. (NYSE: KMI), a $45 billion market cap U.S. midstream company that still owns 70% of the business. In other words, Kinder Morgan Canada can punch above its weight.

That said, Kinder Morgan Inc. ends up having a major influence on the decisions that Kinder Morgan Canada makes. For example, it was probably the right decision to sell the troubled Trans Mountain pipeline to get out from under the headwinds facing the project. That sale, however, left Kinder Morgan Canada with billions in cash that Kinder Morgan Inc. wanted to get its hands on. So the U.S. company pushed through a huge special dividend at the Canadian company.

TransCanada, meanwhile, has continued to push the Trans Mountain pipeline because it has the heft to keep fighting for the project even if it's facing pushback. All in all, when it comes to size, TransCanada has the clear edge here, since Kinder Morgan Canada's small size and relationship with industry giant Kinder Morgan Inc. can create complicated crosscurrents for shareholders to navigate.

2. How far do they reach?

This one could have been included with size, but it makes sense to break it out because of the stark differences here. Kinder Morgan Canada owns three assets: one pipeline and a couple of terminals in, as you might expect, Canada. TransCanada has assets spanning from Canada all the way to Mexico. It owns 57,000 miles of natural gas pipelines, 650 billion cubic feet of natural gas storage, 3,000 miles of oil pipelines, and 6.1 gigawatts of electric production capacity.

We already knew that TransCanada was the larger company, but its scale also provides it with more levers to support the top and bottom lines and grow the business. It also provides more balance to the overall portfolio, since no single asset is likely to derail the company. As for Kinder Morgan Canada, well, its small portfolio increases the risk that troubles with one asset will hit top- and bottom-line results. And it simply doesn't have the same options for new projects that a company with assets across three countries has. Once again, TransCanada looks like the winner.

3. A plan for growth

Still, a small investment can have a big impact at Kinder Morgan Canada. For example, the company is targeting capital spending of roughly $32 million in 2019, a sum that wouldn't even cause a ripple at TransCanada. But that tiny investment is projected to increase adjusted EBITDA by a hefty 12% this year. That's a clear benefit for investors who prefer a company with long-term growth ahead of it. The only problem here is that the sale of the Trans Mountain pipeline basically left Kinder Morgan Canada without any long-term plans. Until it lays out a longer-term game plan, there's really no way for investors to have a handle on what will happen in 2020 and beyond.

TransCanada, meanwhile, has CA$36 billion worth of projects in the works through 2022. Yes, it needs that kind of investment to keep the business growing because of its size. However, it has a clear plan. And it expects these projects to result in roughly 9% adjusted EBITDA growth annually through 2021, using 2015 as the base year. That, in turn, is expected to support dividend growth of 8% to 10% annually through 2021 (more on dividends below). These are impressive numbers backed by a concrete plan, even if some pieces of that plan (Keystone XL, for example) aren't going as smoothly as hoped. This is an easy win for TransCanada.

4. Returning value to shareholders via dividends

Because Kinder Morgan Canada was created in 2017, it isn't exactly fair to compare its dividend record against that of TransCanada, which has been around for decades. But it is still something investors need to think about. TransCanada has increased its dividend every year for 19 consecutive years. Kinder Morgan Canada's dividend has been stuck in neutral for a year and a half, which makes complete sense given the uncertainty about the direction of long-term growth. To be fair, once it comes up with some long-term plans and has the time to execute them, dividend growth will likely be part of the equation at Kinder Morgan Canada. But for now, TransCanada has a much better dividend track record.

5. Leveraging the future

One of the most interesting things about Kinder Morgan Canada right now is its balance sheet. The Canadian midstream company's trailing debt to EBITDA ratio is 0.2 times, which is minuscule compared with TransCanada's 5.4 times. In fact, 0.2 is well below even the most conservative names in the midstream space like Enterprise Products Partners. Clearly, that has to do with the cash from the sale of the Trans Mountain pipeline. However, it means that the company has ample room on its balance sheet to support its long-term growth plans -- once it figures them out.

TransCanada's leverage, meanwhile, isn't exactly outlandishly high, but it is toward the high end of the midstream industry. Still, it has a long history of operating with more leverage than many of its peers. So this isn't a black mark as much as an issue to monitor. Without question, Kinder Morgan Canada wins when it comes to balance-sheet strength.

We have a winner, for now

Add it all up and most investors would be better off owning TransCanada today than investing in Kinder Morgan Canada. That includes the fact that TransCanada sports a yield of roughly 4.8% versus Kinder Morgan Canada's 4.2%. However, investors might want to reevaluate this story when Kinder Morgan Canada's long-term growth plans become a little clearer. Conservative types will probably still be better off with larger TransCanada, but it's always a good idea to keep an open mind.

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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.