High Dividend 50: Kinder Morgan

Published on January 18th, 2022 by Samuel Smith

Kinder Morgan (KMI) is an attractive dividend stock that is currently offering a very safe 5.9% yield alongside a reasonably attractive valuation.

It is one of the high-yield stocks in our database.

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In this article, we will analyze the prospects of Kinder Morgan.

Business Overview

Kinder Morgan, Inc., in its current form, conducted its initial public offering on 2/10/11. Today, the company is among the largest energy companies in the U.S. It is engaged in storing and transporting oil and gas, and other products. It owns an interest in or operates approximately 83,000 miles of pipelines and 144 terminals.

Source: Investor Presentation

Its pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide (CO2), and more. Kinder Morgan’s transportation assets operate like a toll road, whereby the company receives a fee for its services, which generally avoids commodity price risk. Approximately 90% of Kinder Morgan’s cash flow is fee-based.

On October 19th, 2022, Kinder Morgan reported its third-quarter financial results. Q3 net income attributable to KMI stood at $576 million, compared to $495 million net loss in the year-ago period. Distributable cash flow increased to $1.12 billion from $1.01 billion in the year-ago period. Adjusted earnings increased to $575 million from $505 million year-over-year. Revenue increased by 35.6% to $630 million year-over-year. Meanwhile, KMI’s natural gas transport volumes remained flat year-over-year, total refined product volumes decreased by 2% on a year-over-year basis, while crude and condensate pipeline volumes were also down by 5% year-over-year.

Furthermore, for FY2022, Kinder Morgan continues to expect a net income attributable to KMI of $2.5B and declare dividends of $1.11 per share, distributable cash flow of $4.7B, and adjusted EBITDA of $7.2B and aims to end 2022 with a 4.3x net debt-to-adjusted EBITDA ratio. Finally, the management approved a $0.2775 cash dividend for the third quarter.

Growth Prospects

Kinder Morgan’s biggest growth catalysts for the future are new pipeline and terminal projects. Natural gas is a compelling growth catalyst and continued to drive growth in the first half of this year. Natural gas is rapidly replacing coal, which gives Kinder Morgan a major advantage.

Unfortunately for them, new pipeline projects face severe political headwinds for the foreseeable future, so growth for the company will likely slow significantly. The company plans to continue investing in growth projects and joint ventures in 2023 and expects to fully fund them with internally generated cash flow without needing to access capital markets.

For 2022, we expect Kinder Morgan to generate DCF per share of approximately $2.22. The company grew its dividend by 1.9% in 2021, and analysts expected a $1.11 per share dividend in 2022. We expect the company’s DCF per share to increase steadily over the next half-decade due to continued incremental growth projects and share repurchases.

Competitive Advantages

Kinder Morgan operates in the cyclical energy sector, but its business model still enables it to generate fairly stable cash flows. This stems from the fact that it owns North America’s largest CO2 transportation, independent refined products transportation, independent terminal, and natural gas transmission businesses. It transports approximately 40% of all U.S. natural gas, making it a huge player in the natural gas industry.

Kinder Morgan also enjoys a very stable cash flow profile, with 63% of its cash flow stemming from take-or-pay contracts, a further 25% from fee-based contracts, and another 6% of it is hedged against commodity price swings, leaving only 6% as commodity-price sensitive. On top of that, the vast majority of its counterparties are investment grade.

Source: Investor Presentation

Dividend Analysis

Kinder Morgan has been growing its dividend at a slow but steady pace in recent years, with the dividend growing by 2.8% this year and analysts expecting 2.8% growth again next year. Through 2026 the Wall Street analyst consensus estimates a 2.8% dividend CAGR for the company. While not a fast dividend grower, Kinder Morgan’s dividend appears to be very safe as this year’s dividend is expected to be covered a whopping 1.96 times by expected 2023 distributable cash flow, and the balance sheet is in very solid shape with a BBB credit rating from S&P.

Final Thoughts

Kinder Morgan is a compelling high-yield dividend stock given its solid investment grade balance sheet, very defensive and stable cash flow profile, strong competitive position within the natural gas infrastructure industry, and its high and well-covered dividend yield.

While growth prospects are not overly strong, the company has numerous avenues to generate consistent growth in the coming years, which should in turn, combine with its low payout ratio to continue to fuel consistent dividend per share growth for many years to come.

Overall, we view Kinder Morgan as offering an attractive risk-reward profile that will likely provide reliable and lucrative income to investors for many years.

If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them regularly: