Few stocks offer the combination of both current income and future dividend growth like Kinder Morgan Inc. (NYSE:KMI). Kinder Morgan Inc is part of the much larger Kinder Morgan family of companies which when combined constitute the third largest energy company in North America by enterprise value. Kinder Morgan recently announced its 2014 financial expectations and projections. Much like in prior years, Kinder Morgan anticipates near double-digit growth in its annual dividend. Kinder Morgan's last declared quarterly dividends was for $0.41 per share and currently yields 4.90%.
Every discussion of Kinder Morgan should probably start out by explaining its rather complicated corporate structure. Kinder Morgan in the general partner, or GP, of both Kinder Morgan Energy Partners (NYSE:KMP) and El Paso Pipeline Partners (NYSE:EPB). These two other stocks are midstream MLPs while Kinder Morgan is a dividend paying C-corp. Also note Kinder Morgan Management (NYSE:KMR), which is KMP's manager. Each share of KMR pays out a quarterly stock dividend nearly equal to KMP's quarterly cash distribution. For a fuller explanation please see my earlier article on KMR.
However, Kinder Morgan does have tons of exposure to both KMP and EPB as the vast majority of its cash flow comes from either IDRs or distributions from these companies. Besides being the GP, Kinder Morgan owns about 10% of the limited partner interest in KMP and 41% for EPB. During Q3 2013, Kinder Morgan generated around $623M from its limited partner and GP interests in KMP, KMR, and EPB.
2014 Guidance points towards 8 to 10% dividend growth
On December 3, Kinder Morgan announced its preliminary 2014 projections. While much of the release was dedicated to news regarding KMP's capital budget, there was some information regarding Kinder Morgan and its future dividend.
Kinder Morgan expects to declare about $1.72 per share in dividends for FY 2014. This would mark a 10% increase from Kinder Morgan's initial 2013 projection of $1.57 per share and an 8% increase from the currently estimated $1.60 per share in dividends. Do note that the 2013 dividend projection was boosted mid-year by the Capano acquisition.
On a per quarter basis, the 2014 projection is about $0.43 per share, or $0.02 above the current level. Do note that the company has typically increased its dividend gradually every quarter. If this trend continues, Kinder Morgan is likely to see its Q4 2014 dividend above $0.43 per share.
Do note however that Kinder Morgan's dividend increases have consistently exceeded its projections. For 2011 and 2012, the budget called for $1.16 and $1.35 respectively in annual declared dividends. However, the actual FY dividends came at $1.20 for 2011 and $1.40 for 2012. As noted above, for 2013, Kinder Morgan's initial budget called for dividends of $1.57 while the current estimate is for dividends of $1.60. Kinder Morgan's previous guidances clearly seems to have been conservative.
Is there a reason for the decline?
As seen by the recent decline in its share price, the market appears to be disappointed by Kinder Morgan's projections. However, this projection is well within previous guidance. Kinder Morgan has typically aimed for a long-term, 3 to 5 year target of 8 to 10% dividend growth.
This begs the question: Why are Kinder Morgan's shares down over 5% today? If I were to speculate, the reason for the decline has much less to do with Kinder Morgan specifically but rather with EPB. As of this writing, shares of EPB are down nearly 10%. The recently announced projections point towards distributions of $2.60, which implies a very low growth rate of 2% from 2013 levels.
EPB's 2% growth for 2014 is frankly unacceptable considering the other options in the midstream MLP sector. For example, KMP's guidance points towards 5% growth. In addition, KMP also had offered a higher yield compared to EPB before the recent meltdown in the later. Also adding fuel to the fire would have to be several downgrades coming from Morgan Stanley and Tudor Pickering.
While the slowdown in anticipated dividend growth is disappointing, a 5% yield with a nearly 10% projected dividend growth rate is hard to ignore. Given its strong track record of dividend-growth and high insider ownership, the recent decline in Kinder Morgan appears to be a buying opportunity.
Do note that Kinder Morgan generates most of its cash from its equity holdings in the MLPs. It is therefore dependent on their success in order to achieve its dividend growth targets. In addition, Kinder Morgan is heavily leveraged, with a 5.1x debt to EBITDA ratio. However, the company is likely to dropdown more assets to KMP and EPB next year which should lower its overall debt.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.
Disclosure: I am long KMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.