Kinder Morgan(NYSE: KMI) is up over 41% year to date, crushing the performance of the S&P 500 and the broader energy sector. The run-up in the stock price has taken the energy company's shares to their highest level since 2015. It has also pushed Kinder Morgan's dividend yield down to 4.6% -- but that's still a much higher yield than investors can get from an energy sector exchange-traded fund.
Let's dive into the pipeline and infrastructure giant's third-quarter earnings report to see what could drive the dividend stock even higher or what could begin to hold it back.
Image source: Getty Images.
High expectations for growth
Kinder Morgan's earnings per share (EPS) were up 17% compared to the third quarter of 2023, but on an adjusted basis, earnings growth was flat. Adjusted EPS for the nine months ended Sept. 30 rose just 5% compared to the same period last year. All told, decent growth but nothing out of the ordinary.
Kinder Morgan's meteoric rise in 2024 isn't a result of what it is doing now but what its project pipeline could deliver in the coming years. It deserves a lot of credit for making many savvy acquisitions over the last few years that pair nicely with its existing assets and diversify its revenue streams.
In 2021, management acquired Stagecoach Gas Services for $1.23 billion, which added pipeline and storage assets complementary to its existing Northeast infrastructure. Also in 2021, Kinder Morgan bought Kinetrex Energy for $310 million to diversify into the renewable natural gas (RNG) business. It then bought North American Natural Resources for $135 million in 2022 to expand its RNG portfolio further.
As organic matter decomposes in landfills, it emits methane, which can be captured, processed, and turned into pipeline-quality gas. Kinder Morgan's RNG business has faced start-up delays, but it could still be a winner over the long-term.
In December 2023, the company closed its $1.815 billion acquisition of NextEra Energy Partners' South Texas assets. The deal is a bet on the sustained growth of natural gas production from the Permian Basin and the export of that gas to Mexico and liquefied natural gas (LNG) from terminals along the U.S. Gulf Coast to buyers overseas.
In July, Kinder Morgan announced the $3 billion South System Expansion 4 Project, which is a play on growing power generation and residential demand for natural gas in the southeastern U.S. On its third-quarter earnings call, it announced an expansion to its Gulf Coast Express Pipeline Project, which transports natural gas from the Permian Basin to Agua Dulce, Texas, a town just west of Corpus Christi, one of the largest LNG export hubs in the country.
Management believes natural gas will power data centers and support artificial intelligence (AI) workflows. "In my decades of experience in the midterm arena, I've never seen a macro environment so rich with opportunities for incremental build-out of natural gas infrastructure," said executive chair Rich Kinder when discussing the future demand for natural gas on the third-quarter earnings call.
In sum, Kinder Morgan has plenty of opportunities to invest capital in projects that can grow its free cash flow and, in turn, its dividend payment.
Kinder Morgan could cool off
Kinder Morgan's project pipeline should help accelerate its free cash flow and earnings growth. The company has modestly increased its capital expenditures (capex) over the last few years.
Still, over the last five years, its capex has been essentially flat, indicating that it is taking a cautious approach to growth. In the early and mid-2010s, the company overly leveraged its balance sheet, leading to a 75% dividend cut during the downturn of 2015.
As you can see in the chart, Kinder Morgan has gradually increased its dividend, but not to pre-cut levels. However, it has reduced its long-term debt net of cash by 35% in the last 10 years.
KMI net total long-term debt (quarterly); data by YCharts.
In 2019, the company increased its quarterly dividend from $0.20 per share to $0.25 but has made tiny raises since then, with the current quarterly payout at just $0.2875. Gone are the days of it being a 6% to 7% yielding stock.
Kinder Morgan must prove that its project pipeline and long-term growth trends in AI and LNG exports can result in meaningful cash flow and dividend growth. Still, it remains a solid way to generate passive income, just not as compelling as in past years.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
