I’m torn as we enter Round 2 of InvestorPlace’s Stock Market March Madness, as I have to choose between two of my favorite energy stocks, ExxonMobil Corporation (XOM, Financial) andKinder Morgan Inc (KMI, Financial).
Exxon beat rival oil major Chevron Corporation (CVX, Financial) in Round 1. (You can read my Round 1 pregame predictions here.) While I consider Exxon to be the better buy of the two majors because of its better potential for dividend growth and its massive holdings of Russian drilling rights bought for a song, Chevron was no pushover. The fan voting made this one of the tighter races.
Kinder Morgan’s win over Duke Energy (DUK, Financial) was a blowout, however. Kinder Morgan took 81% of the vote, and justifiably so. Kinder Morgan is a blue-chip pipeline operator in position to buy up assets from distressed shale producers on the cheap, whereas Duke is a slow growth utility that will face very serious headwinds once rates bond yields eventually start to rise.
I expect Round 2 to be a close game, but I’m going with Kinder Morgan. Let’s take a look at each team.
Kinder Morgan
Kinder Morgan is not an “oil major,” per se, as it has little international reach and little in the way of upstream energy exploration, but it 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 KMI’s 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.
After its reorganization last year that saw it merge with its popular master limited partnerships, Kinder Morgan now sports a gargantuan $87 billion market cap. This pales in comparison to ExxonMobil’s $353 billion market cap, but it’s enough to make Kinder Morgan the fourth-largest holding in the Energy Select Sector SPDR ETF (XLE). ExxonMobil is the largest holding, of course.
My choice of Kinder Morgan comes down to dividends. Kinder Morgan sports a higher current yield than Exxon (4.5% vs. 3.3%), and while all dividend forecasts have to be taken with a grain of salt following the collapse in the price of crude oil, Kinder Morgan should also be in better position to raise its dividend in the years ahead, come what may with energy prices.
Since initiating its dividend in 2011, Kinder Morgan has more than tripled its quarterly dividend. In the last year, its dividend is up a cool 9%, and management wrote last year that it expected to see dividend growth of at least 10% per year through 2020. That may be harder to achieve if domestic energy production falls off, but it is still probably a little better than what ExxonMobil will be able to produce going forward.
ExxonMobil
I should be clear on one point, however: ExxonMobil is no slouch when it comes to raising its dividend. And as I wrote back in December, ExxonMobil continued to raise its dividend throughout the 1980s and 1990s, one of the worst energy bear markets in history. From 1980 to 2000, Exxon nearly tripled its quarterly dividend from $0.075 per share to $0.22.That works out to annualized dividend hikes of about 6% per year.
That’s not too shabby at all, and if Exxon could achieve that over the next several years I would be thrilled. But I don’t think that 10% annual growth is likely unless we see energy prices rebound in a hurry.
I would be remiss if I didn’t mention that Exxon is one of only three public companies in America to still have a AAA bond rating. The other two areMicrosoft Corporation (MSFT)and Johnson & Johnson (JNJ). Exxon may be operating in a tough environment right now, but this is still one of the very bluest of blue chips.
Kinder Morgan and ExxonMobil are both stocks that I’d be comfortable recommending you buy and hold, reinvesting your dividends. But in Round 2, I’m expecting Kinder Morgan to pull through with a win.
Disclosure: Long KMI, XOM, MSFT, JNJ
