Is Kinder Morgan stock a buy?

If you look at Kinder Morgan (KMI 0.51%)it’s likely for a combination of its yield, which is 5.2%, and its size as one of the largest midstream companies in North America. But there’s a backstory here that you need to understand before buying the stock. For some conservative income investors, Kinder Morgan will be a very difficult stock to justify buying.

What does Kinder Morgan do?

Kinder Morgan is a midstream company, meaning it owns vital infrastructure such as energy pipelines, storage, transportation and processing assets. The energy sector cannot function without companies like Kinder Morgan, because they help move oil and natural gas from where they are produced to where they are used up. As long as oil and natural gas remain important to the world, Kinder Morgan’s infrastructure will remain important to its customers in the energy industry.

Image source: Getty Images.

The key here, though, is that Kinder Morgan is a charge. It charges fees for the use of its assets. Thus, the demand for energy is much more important to the company’s activity than the price of the goods flowing through its system. Because demand for oil and natural gas tends to remain robust even when energy prices are low, Kinder Morgan’s cash flows tend to be fairly reliable throughout the energy cycle.

So supports the high dividend yield of 5.2% it offers. That yield is multiple compared to what you would get from one S&P 500 index fund (1.2%) and significantly higher than the average energy stock (3.2%). Dividends have been increased annually since 2017. And the dividend sits atop an investment-grade balance sheet. So far, the story here seems quite attractive.

The problem with Kinder Morgan as a dividend act

Quite clearly, Kinder Morgan is a dividend stock. But here too a big problem arises. Typically, income investors like to buy companies that they believe will pay them regularly year after year. Essentially, investors want to own companies that are likely to continue to pay their dividends hard. Kinder Morgan’s history is not particularly inspiring in this regard.

The story dates back to 2015, when management told investors on Oct. 21: “While we are early in the 2016 budget process, we currently expect to increase our 2016 declared dividend by 6 to 10% over our 2015 dividend.” $2.00 per share We expect this range to give us the flexibility to cover our dividends and have excess cash coverage.”

On December 8, 2015, Kinder Morgan announced that it would cut its dividend by 75% in 2016. The company made the right choice for the business, as it basically had to choose between capital investment and dividend plans due to an already high debt. But dividend investors who took management at their word were likely disappointed.

And then there was 2020, when the company was scheduled to increase the dividend by 25% to reach an annual run rate of $1.25 per share. This was the final part of a plan that was basically designed to win the confidence of investors. However, due to the uncertainty surrounding the coronavirus pandemic, the company only increased the dividend by 5%. Management noted, “We remain committed to increasing the dividend to $1.25 annually.” It is now 2024 and the dividend still has not reached the target level.

Again, Kinder Morgan probably made the right decision for its business. But investors who trusted the company to keep its word on the dividend were disappointed. Twice this has happened in less than a decade. If confidence around the dividend is important to you, then Kinder Morgan will probably be a tough stock to buy.

There are more reliable income options out there

Buying Kinder Morgan becomes even more difficult to justify when you consider that competitor Enterprise product partners (EPD 1.04%) has a yield of 7.1%. This yield is backed by an investment-grade balance sheet and a 26-year streak of dividend growth. Basically, if you’re looking for a large and reliable income stream, you’d be better off looking elsewhere in the midstream space.