Kinder Morgan: Buy This High-Yield Dividend Stock Now
Summary
- Kinder Morgan is an important energy company with great strategic value and a long-term growth path in the vital natural gas industry.
- Kinder Morgan budgets $4.4b in cash flow in FY 2021, which supports its dividend and 6.3% yield.
- KMI is in a bullish setup and has a low valuation based on the P-B ratio.
Would you want to invest in one of the largest energy infrastructure companies in the US with contracted cash flows, a strong long-term growth picture, good coverage and a 6.3% yield? I would! Kinder Morgan (NYSE:KMI) is a buy.
Kinder Morgan really needs no introduction, but in case you do, here are some quick facts about Kinder Morgan:
Kinder Morgan is one of the largest energy infrastructure companies in the US with 83,000 miles of natural gas, refined products, crude and carbon dioxide pipelines. About 40% of natural gas in the US goes through Kinder Morgan’s pipelines which makes the company an essential part of America’s energy architecture.
Its pipelines span the entirety of the United States and connect supply basins to terminals and export hubs, especially along the Gulf Coast.
(Source: Kinder Morgan IR Presentation)
Moving 40% of a country’s natural gas demand through your pipeline network makes you strategically important and Kinder Morgan will play an important role in securing America’s energy needs.
Long-term, US energy consumption is only going to grow. The industry outlook shows demand growth for every source of energy with the exception of coal.
While the largest growth can be found in low-carbon energy sources like renewable energy, oil and natural gas are not going anywhere. It is expected that natural gas demand will grow +29% and oil demand +7% by 2040. Natural gas is expected to represent 25% of total expected energy demand in 2040 and will become the second most important energy source after crude.
Kinder Morgan would obviously profit from this demand scenario given its natural gas-heavy pipeline footprint and large-scale ability to connect supply basins to the Gulf Coast.
(Source: Kinder Morgan IR Presentation)
Natural gas production and demand will continue to grow in the US because natural gas has a couple of advantages: It has low emissions, is low-cost and is an efficient source of energy.
Large natural gas basins have been found in the US in recent years. Just three basins - Haynesville, Permian and Northeast - are expected to propel natural gas production moving forward.
(Source: Kinder Morgan IR Presentation)
Natural gas pipelines generate most of Kinder Morgan’s earnings before depreciation and amortization. In FY 2020, Kinder Morgan made $4.5b with natural gas or 63% of total earnings.
(Source: Kinder Morgan Annual Filing)
Kinder Morgan’s unique selling point: contracted cash flows
Kinder Morgan enters into supply contracts with customers to push natural gas, crude and refined products through its pipeline network.
Take-or-pay contracts are typical in long-term supply relationships and under such a contract a buyer must pay Kinder Morgan for pre-determined quantities of natural gas (and take them) or pay for those quantities regardless. Take-or-pay contracts are critical for Kinder Morgan and guarantee secure cash flows.
(Source: Kinder Morgan Annual Filing)
Most of Kinder Morgan’s contracts are either take-or-pay (68%) or fee-based (25%) which means 93% of all contracts are not dependent on commodity prices … which is valuable during times of extreme price uncertainty like in 2020.
(Source: Kinder Morgan IR Presentation)
Regardless, Kinder Morgan as a large pipeline company has substantial risk and this risk should not be downplayed. COVID-19 affected Kinder Morgan adversely last year as business activities were shut down and demand was hurt. COVID-19 remains a big risk factor now and, in the future, especially if it depresses energy demand. When the economy reopens, however, this risk should be gradually reduced.
2021 budgeted cash flow, coverage and dividend
Energy companies are often evaluated based on whether they can fund capex and dividends through cash flow alone. If a company can do that, and maybe even achieve a surplus, that’s great … because it means it doesn’t have to raise any debt or equity.
Kinder Morgan has been able to fund its capex and dividends out of cash flow since 2016 and the last five years ... a time during which commodity prices swung wildly.
(Source: Kinder Morgan IR Presentation)
Kinder Morgan’s budget estimates $4.4b in distributable cash flow for FY 2021 and $1.95-share. DCF corrects adjusted earnings for depreciation, amortization, taxes and sustaining capex and sets a baseline amount that can be distributed to shareholders.
With an estimated payout of $1.08-share in FY 2021, assuming 3% annual dividend growth, Kinder Morgan's estimated coverage ratio of 1.8x. The coverage ratio in FY 2020 was 1.9x. A coverage ratio above 1.0x shows that the dividend is secure and the higher the ratio is, the better. A coverage ratio near 2.0x means Kinder Morgan pays out only half of what it could pay out, which means the dividend is secure.
(Source: Kinder Morgan IR Presentation)
Kinder Morgan pays a dividend of $.2625 for each share each quarter and shares pay a 6.3% yield, 4.3 times the yield of the S&P 500. Dividend growth has resumed since Kinder Morgan cut its dividend in 2015.
Kinder Morgan and rivals
Kinder Morgan is a large pipeline company and can be compared to its rivals Enterprise Products Partners (EPD) and Enbridge (ENB). Kinder Morgan runs a capital-intensive business which makes it appropriate to value the business based on book value.
Kinder Morgan has a P-E ratio of 1.2, the lowest in this group of pipeline companies.
KMI | EPD | ENB | |
Market Cap $b | $37.8 | $49.2 | $74.1 |
Enterprise Value $b | $72.6 | $79.0 | $137.4 |
Share Price | $16.7 | $22.52 | $36.72 |
P-E Ratio | 17.7 | 10.8 | 15.3 |
P-B Ratio | 1.2 | 2.0 | 1.8 |
Yield % | 6.3 | 8.1 | 7.1 |
(Source: Author)
Chart analysis
KMI has seen upward momentum starting in November with help from stabilizing commodity prices. The trend canal has been confirmed multiple times and KMI is about testing the upper bound of its trend canal. A breakout over $16.80 would be a very bullish sign. A failed breakout could push KMI lower towards $15.80. A break of the lower bound of the trend canal would constitute a negative sign, short term. KMI has strong support around $13.50 and $13.75.
(Source: Finviz)
Closing thoughts
You can buy a leading energy infrastructure company with a huge natural gas footprint, a positive demand outlook and strong coverage for just 1.2 times book value, muss less than its rivals. Kinder Morgan's contracted cash flows are a major source of cash flow stabilization and the excellent coverage shows that the risks to the dividend are minimal.
This article was written by
Analyst’s Disclosure: I am/we are 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (112)
They had some volume issues across their system during the event, though I guess they could have made up for it elsewhere. I wouldn’t be surprised if the event was a negative hit to earnings. Having kept my power and heat I personally am thankful to them and everyone else who worked to keep the lights on and I feel terribly for the people who were less fortunate.
Remember they control some storage fields and I expect they traded around their assets at record gas prices. So I think we see a nice surprise for first quarter earnings
That’s fair. I guess we’ll see in a few weeks.
Uh except throw in a once in a lifetime oil crash from $100 to negative numbers and a world wide pandemic.
O Kmi announced that cap growth will be between $1.0b and $1.5 b a year for next 3-5 years. At 15% returns that adds $150mm in dcf a year
O kinder was the asset guy at Enron. He left in 1996. Enron went belly up in 2001. Read smartest guys in the room or pipe dreams. He had little to do with the fiasco
O enough with the divy cut. That was 5 years ago. Invest in the future not the past. In 2008 apple was nearing bankruptcy and look at it now.
O even if Kmi never built another asset tge stock price could grow if they rebought the stock with all excess cash flow. That excess cash flow if you add back future cap ex is $2.0b a year. That equates to buying back 125mm shares a year or 5% of the shares outstanding. It would only take 4-5 years to drive the stock to a double. Epd and Kmi are the companies to invest in this space. I sold enb and reallocated to these two.
I choose to get out of enb because all the issues they are having on cross border pipelines as well as a lot of assets in oil. I favor nat gas. At 6% yield I believe Kmi is safer with a little room to run.
