Kinder Morgan (NYSE: KMI) stands out for its high dividend yield of nearly 5%, which is one of the highest yields in the S&P 500. However, unlike some high-yield dividend stocks, the company's big-time payout is on a very sustainable foundation.
That view was abundantly clear when reviewing Kinder Morgan's recent third-quarter earnings report. The pipeline company produces very stable earnings that should grow in the future. That should give it the fuel to continue increasing its high-yielding payout.
As steady as it goes
Kinder Morgan delivered very stable third-quarter results. The pipeline company generated nearly $1.9 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), up about 2% from the prior-year period. Meanwhile, its distributable cash flow was flat year over year at $0.49 per share. That was more-than-enough cash to cover its $0.2875 per share dividend payment in the quarter, which was 2% higher than in the year-ago period.
Powering the company's solid showing in the period was its natural gas pipeline segment:
Data source: Kinder Morgan. Chart by the author.
Gas pipeline earnings rose 7% year over year, driven by the company's acquisition of STX midstream, higher contributions from its Texas Intrastate system, and expansion projects on the Tennessee Gas Pipeline. Overall, Kinder Morgan's natural gas transport volumes increased by 2%, while its gathering volumes grew by 5%, due to higher production in the Haynesville and Eagle Ford regions.
Kinder Morgan's terminals segment also delivered higher earnings (3% growth year over year). The company benefited from expansion projects placed into service and higher rates on some of its terminal and tanker assets.
The growth in those segments helped offset lower earnings from its products pipelines (12% decline) and carbon dioxide (7% lower) businesses. Lower commodity prices weighed on its products-pipelines segment, while asset sales, lower crude oil volumes, and higher power costs impacted its carbon dioxide segment.
Kinder Morgan produced over $1.2 billion in cash flow from operations in the period, pushing its year-to-date total to over $4.2 billion. That's been more than enough to cover capital spending (nearly $1.9 billion) and its dividend payments ($1.9 billion), with room to spare ($353 million).
The excess cash flow helped strengthen the company's already rock-solid balance sheet. Kinder Morgan ended the quarter with a 4.1x leverage ratio, well within its 3.5x-4.5x target range. It's on track to end the year with a 3.9x leverage ratio.
Even more growth is coming down the pipeline
Kinder Morgan placed $484 million of expansion projects into service during the third quarter, which will supply it with incremental cash flow in the coming quarters. The company quickly refilled its backlog by adding several new projects. It ended the quarter with $5.1 billion of projects, down from $5.2 billion at the beginning of the period.
The biggest addition is a project to expand the capacity of the Gulf Coast Express Pipeline by 570 million cubic feet per day. The $455 million project (Kinder Morgan's share is $161 million) should enter service by the middle of 2026.
Another notable new project is the $94 million ($35 million net to Kinder Morgan) Gulf Coast Storage Expansion project at Natural Gas Pipeline Company of America. The project will add 10 billion cubic feet of additional natural gas storage capacity when it enters commercial service in the first half of 2027.
More expansion projects could be coming down the pipeline. CEO Kim Dang commented on the opportunities it's working on in the third-quarter earnings report. She stated: "Discussions around opportunities related to significant new natural gas demand for electric generation associated with coal conversions at power plants, artificial intelligence operations, cryptocurrency mining, data centers and industrial reshoring also continued during the quarter, and we now see an opportunity set well in excess of 5 Bcf/d in that area."
That large opportunity set drives the company's view that it should be able to invest about $2 billion annually into high-return growth projects. Expansions will grow its cash flow, giving it more fuel to increase its dividend (which it has done for seven straight years).
A rock-solid income stock
Kinder Morgan delivered solid third-quarter results, fueled by its stable and steadily growing natural gas pipeline franchise. It's producing more-than-enough cash to cover its high-yielding dividend and growing expansion-project backlog.
Those projects will help increase the company's cash flow in the future, giving it the power to continue raising its dividend. Add in its strong and improving balance sheet, and Kinder Morgan is an excellent stock to buy for those seeking a sustainable and steadily rising stream of dividend income.
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Matt DiLallo has positions in Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
