Kinder Morgan (NYSE:KMI) is a significant player in North America’s energy infrastructure scene and is hustling to slash its leverage ratio. Notably, the recent $1.8B acquisition of NextEra Energy Partners’ (NEP) STX Midstream highlights Kinder Morgan’s energetic push to bolster its energy business in Texas. Trading at a sweet valuation and boasting a solid 6.7% dividend yield, Kinder Morgan’s use of fee-based contracts is a shield against market price risks, ensuring a steady flow of dividends.
Previous rating
In a previous report in May, Kinder Morgan was a strong buy due to its robust DCF coverage and the hefty potential it brought for dividend investment. The growth stemming from the STX Midstream acquisition is an added cherry on top, accentuating the attractiveness of KMI.
Kinder Morgan’s acquisition potential
Eyeing further expansion, Kinder Morgan, with a market cap of $38B, wields an extensive natural gas transmission network spanning 70k miles and an array of other transportation, terminal, and storage assets scattered across the country.
With an appetite for growth, Kinder Morgan is seizing the opportunity to snap up new energy assets like pipeline networks, storage, and processing capacity. These acquisitions act as the fuel for Kinder Morgan’s distributable cash flow growth.
The recent strategic acquisition in Texas doesn’t just pump up Kinder Morgan’s pipeline network density, especially in South Texas, it also comes at a reasonable price, at 8.6X FY 2024 EBITDA, signaling a swift injection of accretive power to distributable cash flow per share.
Wrapped-up dividends
Unfurling the dividends band, Kinder Morgan reported a distributable cash flow of $0.49 per-share in Q3’23, with a payout ratio of 57.7%, signaling a sturdy foundation for its well-supported dividend.
(Source: Author)
Road to debt reduction
Kinder Morgan’s debt reduction journey paints a picture of resilience, showcasing its move away from a debt-heavy course toward a sustainable dividend. With a plan to slash the net-debt-to-adjusted-EBITDA ratio down to 4.0X by the year-end, Kinder Morgan is navigating through a 23% decline in its leverage ratio compared to its acquisition heyday.
Acquisition-wise, the company treads cautiously, focused on ensuring acquisitions are DCF accretive without inflating its leverage ratio to perilous heights last seen in 2016-2017.
Valuation dance
Valuing Kinder Morgan based on its enterprise-value-to-EBITDA ratio, shows a picture of robust worth, especially with an expected EBITDA of $7.9B in FY 2024, reflecting a 4% year-over-year growth. Trading at an enterprise-value-to-EBITDA ratio of 9.1X, Kinder Morgan sits shoulder to shoulder with Enterprise Products Partners’ (EPD) valuation ratio, solidifying its financial standing.
Unearthed risks
Kinder Morgan’s relentless pursuit of growth may encounter headwinds if U.S. government priorities shift toward greener energy, impacting its adjusted EBITDA and distributable cash flow growth. However, the untangling of risk remains rooted in its continued focus on steady DCF-based coverage and cautious leverage handling.
Parting thoughts
Kinder Morgan’s strides in debt reduction and its acquisition-led growth strategy paint a vibrant landscape, solidifying its standing as a beacon for dividend investors. With the recent acquisition boosting its distributable cash flow, Kinder Morgan’s allure as a strong buy for dividend investors becomes more pronounced!
