Kinder Morgan, Inc. (KMI 2.53%) is one of the largest midstream companies in North America, and it has major dividend plans between 2018 and 2020. By the end of that period, it expects to increase its dividend from $0.50 per share per year (in 2017) to $1.25. That's huge dividend growth in a short period of time. But don't get too enamored by that news; the dividend will still be lower than it was before the midstream oil and gas company's 75% dividend cut in 2016. If you're looking for dividend income in the midstream space, take a look at longtime dividend payers ONEOK, Inc. (OKE 0.26%) and Magellan Midstream Partners, L.P. (MMP) instead.
Still going strong
Kinder Morgan's dividend growth rate over the next couple of years will be nothing short of incredible. But that's coming off of an artificially low base following its large dividend cut. ONEOK, which has increased its dividend for 16 consecutive years, is calling for dividend growth of around 10% a year through 2021. Sure, Kinder Morgan's dividend growth rate will be higher, but 10% is roughly three times the historical rate of inflation growth. Investors will be well rewarded for owning this 5.3%-yielding midstream company.
Image source: Getty Images.
Backing that dividend growth plan are a largely fee-based business and the company's growth projects. It has roughly $4 billion worth of projects expected to come online by the end of 2020, almost all of which have customers lined up and long-term contracts backing them, so ONEOK isn't risking shareholder money on speculative expansion.
The midstream company is also looking to keep its leverage in check over this span. That's a notable issue, because a key cause of Kinder's dividend cut was the company's heavy reliance on debt financing. ONEOK has already made a lot of progress there, lowering its debt to EBITDA figure from over 6 times to around 4.8 times. The goal is to get that down to around 4 times. For reference, Kinder Morgan's debt-to-EBITDA ratio is currently at around 6.4 times -- an improvement from the over 9 times it was when it was forced to cut its dividend, but still much higher than ONEOK's.
Material dividend growth plans built on concrete capital investment projects, lower leverage, and 16 years of consecutive dividend hikes make ONEOK a better choice than Kinder in my book.
Being careful with your money
Magellan Midstream Partners, meanwhile, has been lowering its distribution growth projections. On the surface, that sounds like a bad thing, but it really isn't when you get beneath the numbers.
In 2017, Magellan was projecting distribution growth of around 8% a year through 2020, but it has now pulled that back to a range of 5% to 8%. The big change is in the partnership's coverage ratio goals. Previously it was expecting coverage to fall to around 1.1 times, which would have provided ample protection for the distribution. However, investors have been increasingly focused on the safety of distributions, and Magellan heard that. It is now planning on maintaining coverage of 1.2 times through this period.
That shift toward distribution safety isn't out of line for this partnership, which is among the most conservative midstream players. Its debt to EBITDA ratio is roughly 3.4 times today -- easily among the lowest levels in the industry. That said, maintaining distribution coverage at 1.2 times will lead to more debt. But management is expecting debt to EBITDA to top out at around 4 times, which will still leave it at the low end of the industry average.
OKE Financial Debt to EBITDA (TTM) data by YCharts.
The company's distribution growth plans, meanwhile, are backed by projected capital spending of $1.3 billion between 2018 and 2019. There's another $500 million on the drawing board that could get added to that total, as well. And at this point, Magellan either has customers lined up to back that spending, or it is expanding facilities where demand clearly indicates a need for more capacity. These, however, are conservative estimates from a company that, as noted above, tends to err on the side of caution.
Magellan has increased its distribution every single quarter since coming public in 2001 -- roughly 18 years. Although the rate of growth is set to slow over the next couple of years, that's because it is focusing on distribution safety. For conservative investors, Magellan's largely fee-based business, 6% yield, long history of rewarding investors, and relatively low risk profile should easily put it ahead of Kinder Morgan.
More than just the growth
Kinder Morgan is not a bad company, but the current round of dividend hikes can't be viewed in isolation since they really stem back to a dividend cut largely caused by its heavy use of leverage. That cut was a huge blow to investor trust in management that shouldn't be taken lightly. Its leverage, meanwhile, is still toward the high end compared to its peers. This helps to partially explain why Kinder is trading at a discount to ONEOK and Magellan.
Despite a relatively low stock price, when you look at a risk/reward trade-off, most dividend growth investors will be better off with less-leveraged ONEOK. This midstream player is calling for material 10% dividend hikes that will extend its already impressive streak of annual increases. Or, for those who are even more conservative, there's Magellan, which has heard investor concerns and is focusing on ensuring its distribution is well covered, even if that means it only grows distributions at around 5% a year.
