In a showdown between Kinder Morgan Inc (KMI, Financial) and Duke Energy Corporation (DUK, Financial), Kinder Morgan will dribble circles around Duke. If we’re playing on college basketball metaphors, Kinder Morgan is Duke University while Duke Energy would be some obscure community college in Wyoming.
I’m probably not being fair to Duke Energy here. It is by no means a bad company within its industry. It just so happens that Kinder Morgan is a long-time holding of mine and one of my favorite stocks at current prices.
Kinder Morgan is the largest energy infrastructure company in North America with about 80,000 miles of pipelines in operation. And while Kinder Morgan has not been completely immune from the effects of falling energy prices, the damage has been pretty minimal. About 85% of its cash flows are fee based, meaning they have virtually no exposure to falling energy prices, and most of the remaining 15% of cash flows are hedged.
I expect that the slowdown in domestic production will slow the rate of growth in the amount of energy that Kinder Morgan transports. But I also expect the effects to be temporary, and in fact, Kinder Morgan is using the slowdown to its advantage. As I wrote earlier in March, Kinder Morgan has been buying quality pipeline assets from motivated sellers.
If you’re considering a purchase of Kinder Morgan or Duke Energy, the dividend of each is a major selling point. So with that, let’s dig into Kinder Morgan’s dividend. Since initiating its dividend in 2011, Kinder Morgan has more than tripled its quarterly dividend. And in the last year, its dividend is up a cool 9%.
Expect a lot more of the same going forward. When Kinder Morgan announced its business reorganization last year, management wrote that it expected to see dividend growth of at least 10% per year through 2020.
Buying Kinder Morgan today, you get to enjoy a 4.4% current dividend. But let’s now assume that hold the stock through 2020 and that management’s estimates are correct. Assuming five years of 10% dividend growth compounded annually, you’d be looking at 61% cumulative dividend growth. That would give you a yield on cost of 7.0% five years from now. And that assumes the minimum 10% annual growth; if Kinder Morgan continues to pick up assets from distressed sellers, the real growth rate might be significantly higher.
One final thing to consider on Kinder Morgan stock: When we buy KMI, we’re investing alongside the people running the company. They have serious skin in the game. Since last February, company insiders have bought a net 812,599 shares worth over $33 million at today’s prices. And Richard Kinder himself earns no compensation other than the dividends he collects on his shares. So Mr. Kinder has every incentive to continue raising Kinder Morgan’s dividend for the benefit of us all.
Now let’s take a look at Duke Energy. There is nothing necessarily wrong with Duke Energy. Its stock has outperform most of its peers in the utilities sector over the past five years, and its total return including dividends last year was nearly 28%.
But as a boring, regulated utility company, Duke cannot possible expect to keep pace with Kinder Morgan. Today, Duke offers a dividend yield that is competitive, at 4.2%. But Duke’s dividend growth rate over the past five years has been a very modest 2.2% per year, and I don’t expect it to accelerate much over the next few years.
Furthermore, Duke and many of its peers in the utilities sector have been used as bond substitutes by yield-starved investors for years. I expect bond yields to stay low for a while, but I also fully realize that the utilities sector will be the first to get slammed once bond yields really do meaningfully rise.
So in Duke, your upside is a 4.2% dividend with 2%-3% growth. That’s hard to get excited about. But in Kinder Morgan, you get one of the fastest dividend-growers in America backed by a class-act owner-operator in Richard Kinder.
The choice is clear here: Kinder Morgan is a slam dunk.
Disclosure: Long KMI
