AT&T Or Kinder Morgan For Your Retirement Portfolio?

Aug.20.14 | About: Kinder Morgan, (KMI)


Kinder Morgan recently announced its dividend plans for the next 6 years or so.

AT&T is known as a staple among the high-yield, high-consistency dividend payers.

This article compares the two companies and determines which one might be a better fit for a retirement portfolio.

Everyone has different goals, objectives and expectations about the investing world. However, one common thread is that once (or if) you stop working there are still cash flow requirements that need to be met. Often this is where an equity portfolio comes into play. Assuredly there are many strategies available, but frequently this means searching for and partnering with higher yielding securities. Most pertinent to this article would be something along these lines: "should you choose AT&T (NYSE:T) or Kinder Morgan (NYSE:KMI)?"

If one is primarily concerned with the potential stream of income, this is a relatively straightforward comparison. Both companies have solid histories and a propensity to reward shareholders.

To illustrate this idea, I think it's important to work through the applicable math. Let's start with Kinder Morgan.

As we all know, Kinder Morgan, Inc. recently announced that it was going to purchase partially held companies Kinder Morgan Energy Partners, L.P. (NYSE:KMP), Kinder Morgan Management, LLC (NYSE:KMR) and El Paso Pipeline Partners, L.P. (NYSE:EPB) with an expected close date by year-end; creating a "drastically simplified Kinder Morgan story." There's been a bevy of articles related to this topic, so this commentary will focus only on the potential dividend income.

In addition to the acquisition announcement, Kinder Morgan also provided some guidance into its expected dividend payments. Specifically, the company was kind enough to provide a pro forma dividend for the new KMI Company reaching out to 2020.

Here's what that looks like:

2015E = $2.00 per share

2016E = $2.20

2017E = $2.42

2018E = $2.66

2019E = $2.93

2020E = $3.22

Obviously anything can happen and these payouts certainly aren't guaranteed. Yet it is the best baseline that we presently have available. If you add in a status quo $0.43 dividend for the end of the year, this equates to about $16 in dividends collected per share over the next six and a third years.

So what does this mean for the potential investor of today? Well, KMI currently exchanges hands at just under $42. If management's predictions come to fruition, this would suggest that an investor of today would have received 38% of their capital back (a 5% yearly return on its own) along with a 2020 yield on cost of about 7.7%; certainly impressive on both accounts.

AT&T's assumptions aren't quite as clear-cut. However, we do have a bit of insight. AT&T has not only paid but also increased its payout for 30 consecutive years and CFO John Stephens recently called the dividend the company's "first priority." Now it is true that the these dividend increases have come in at a compound rate of just 2.3% over the past 6 years -- rising only a penny per quarter each time. However, the high-yield and deliberate commitment should be reassuring.

Like KMI, AT&T is also slated to pay out one more quarterly dividend this year -- in all likelihood $0.46 per share. Beyond this, the future is cloudy, but as an example, let's assume the company can increase its dividend by 4 cents a year moving forward. I don't believe 2% compound growth is all that unreasonable.

Here's what that would look like:

2015E = $1.88 per share

2016E = $1.92

2017E = $1.96

2018E = $2.00

2019E = $2.04

2020E = $2.08

In total this would equate to collected dividends of just over $12 per share. Stated differently, with a current share price around $35, a potential shareholder of today might see 36% of their initial capital back in the form of a dividend. Additionally, this would represent a roughly 6% yield on cost.

In strictly looking at income received, it appears KMI would have a slight edge. However, two important notes should be made. First, Kinder Morgan's payouts rely much more heavily on strong future growth than does AT&T. Thus, there is a bit more risk associated with ascertaining those payouts. Second, even if KMI eclipses AT&T's yearly payout percentage in the next couple of years, this does not factor in the idea of reinvesting AT&T's higher initial yield. It stands that KMI would eventually win out, but the comparison might be a little longer than one would originally imagine.

Looking at total returns is a bit trickier. For instance, if you believed both companies should have a 5% dividend yield in the year 2020, this would require annual price appreciation of about 7% per year for Kinder Morgan and just 3% per year for AT&T based on the expected dividend payments listed above. However, if you believed AT&T should trade with a yield near 4% while Kinder Morgan should have a yield around 6.4%, the potential price appreciation scenarios effectively flip. Total return expectations largely rely on your range of future possibilities.

Luckily, we're mainly focused on the income component for this article. As such, if I were forced to choose between the two, I would also inquire about one's timeframe of thought. I always advocate a long-term (decades) ideology, but it stands that there's a benefit to looking at different periods. If you were to ask me which company would produce more income over the next few years, I would pick AT&T. Then, if we start getting closer to the 7-year, next decade, and so on mark I might give the nod to Kinder Morgan -- perhaps acknowledging a slightly higher level of perceived payout uncertainty.

Yet here's the great thing: you or I don't have to choose between the two. It's not a "pick this or that" type of situation. Both companies appear to be sensible places to begin one's research -- especially if you are primarily concerned with generating a solid stream of income in the coming years. In fact, you could split the difference and go half AT&T, half Kinder Morgan. For that matter, you could build up a collection of similar partnerships. The important part is considering and setting expectations for each investment opportunity in singularity before aggregating them in your portfolio. In the end, if you own both or more, then you don't care too much about which one produces more income, AT&T or Kinder Morgan. You care about replacing your cash flow.

Disclosure: The author is long T.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.