For investors eyeing the enticing landscape of the midstream sector, Kinder Morgan (NYSE: KMI) shines brightly as a top contender. Boasting a market capitalization nearing the $40 billion mark and a business footprint that spans diverse geographical territories, Kinder Morgan commands attention. With a substantial 6.3% dividend yield, there’s no denying the appeal of this industry titan. Yet, before you rush to join the bandwagon, let’s peel back the layers of this company to uncover why it stands out.
Exploring the Case to Buy Kinder Morgan
Kinder Morgan’s possession of midstream assets that are irreplaceable and essential is a prime selling point. Its extensive operations across the United States encompass a wide array of pipelines, storage facilities, transportation networks, and processing assets. The bulk of its business (approximately 64%) revolves around natural gas, a critical component in the global shift towards cleaner energy alternatives. The remaining segments are dedicated to refined products (26%) and CO2 (10%).
Image source: Getty Images.
While there exist other major players in the midstream arena, Kinder Morgan proudly proclaims itself the proprietor of the “largest natural gas transmission network” and the premier “independent transporter of refined products” and “independent terminal operator.” Given the critical nature of midstream assets and their ability to generate robust cash flows, Kinder Morgan enjoys a strong foothold within the energy sector.
The company also has a $3 billion outlay earmarked for capital investments, ensuring the continuous expansion of its portfolio at least until 2026. As these new assets come online, they are poised to amplify cash flow and fortify the company’s dividend payouts. Notably, Kinder Morgan is diligently working towards reducing its leverage, with its debt-to-EBITDA ratio dropping 30% from peak levels in 2018.
KMI Financial Debt to EBITDA (TTM) data by YCharts
Augmenting these strengths is a dividend that has seen annual increments for six consecutive years, an investment-grade balance sheet, and an attractive 6.3% yield. Undoubtedly, Kinder Morgan presents a compelling investment case worth considering.
Is Holding Kinder Morgan the Right Strategy?
If you currently hold Kinder Morgan shares and feel confident in the company and its dividend (more on this below), there seems to be no immediate impetus to divest your holdings. The company seems well-positioned to offer investors steady, albeit gradual growth supported by a predominantly fee-based array of essential energy infrastructure assets. While the lion’s share of returns will likely come from the yield, this should align with your initial expectations when investing. In fact, if you are a dividend-oriented investor aiming to derive income from your portfolio, you may have specifically chosen Kinder Morgan for its dividend. However, a slight wrinkle emerges here.
Considering Selling Kinder Morgan?
In 2016, Kinder Morgan took a drastic measure by slashing its dividend by 75%. Presently, the company finds itself in a more robust financial position, with dividend growth back on the table. Nevertheless, back in late 2015, expectations soared as investors were primed for a substantial dividend hike of up to 10% in 2016, only to be met with disappointment.
Although management charted a course for substantial annual dividend increases through 2020, the reality fell short when 2020 arrived, revealing a mere 5% raise instead of the promised 25% surge. While the decisions made by Kinder Morgan likely benefited the company, they failed to fulfill pivotal promises made to investors.
KMI Dividend Per Share (Quarterly) data by YCharts
It’s reasonable for conservative investors to harbor skepticism, particularly concerning the linchpin of Kinder Morgan’s appeal: the dividend. If the company’s track record with dividends raises concerns, it might be prudent to steer clear. With various other high-yield midstream entities in the market—such as Enbridge (NYSE: ENB) and Enterprise Products Partners (NYSE: EPD)—which have managed to hike dividends even during turbulent energy industry phases, investors have alternatives at hand.
Conclusion: Deciphering Kinder Morgan’s Past and Prospects
Kinder Morgan represents a formidable contender amidst the midstream landscape. While not the highest-yielding option available, it has constructed a substantial business with several compelling attributes. The allure of its yield coupled with imminent dividend growth prospects on the back of planned investments implies a positive trajectory. For those willing to overlook past missteps, there appears to be no compelling reason to forego buying or retaining Kinder Morgan shares. Nonetheless, historical comparisons reveal Kinder Morgan’s deficiency in dividend performance vis-a-vis its peers. Hence, if dividend reliability is a paramount consideration and given that the dividend yield is a primary appeal of the stock, exploring alternatives with stronger dividend track records like Enterprise and Enbridge might be prudent.
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Reuben Gregg Brewer holds positions in Enbridge. The Motley Fool has positions in and endorses Enbridge and Kinder Morgan. The Motley Fool advocates for Enterprise Products Partners. The Motley Fool abides by a disclosure policy.
The insights and opinions presented here are those of the author and may not necessarily align with those of Nasdaq, Inc.
