Richard Kinder continues to prove his critics wrong.
Kinder Morgan’s (KMI) latest earnings shows that dividend and distribution growth is alive and well at the traditionally boring pipeline and midstream giant. Last year, concerns raised by investing newspaper Barron’s along with analysts at Hedgeye Risk Management about KMI stocks cash flows and capex spending sent the leading midstream firm into the toilet.
Well, you can add another quarter of distribution growth on the pile. KMI’s latest earnings showcases why Kinder Morgan is still one of the best midstream firms on the planet.
Another Bang-Up Quarter for KMI
After Hedgeye issued its report back in September on KMP & KMI stock, the key for investors has been the tale of Kinder Morgan’s cash flows and dividends. Well, this is now the third consecutive quarter of solid cash flow growth to counter Hedgeye’s concerns on the midstream giant.
KMI has a vast network of pipelines, terminals and other storage assets — totaling roughly 82,000 miles. That monster network of midstream assets continues to generate higher fees for users. This past quarter was no different as KMI’s focus on natural gas assets — via its buys of El Paso and Copano — has been working flawlessly. Those natural gas pipelines have been a monster source of earnings.
For the latest quarter, Kinder Morgan managed to produce another strong increase to its cash flows. KMI’s cash available to pay dividends increased to a little more than $573 million. That’s a 12% boost year-over-year and helped bump up KMI’s dividend coverage ratio to 1.31 times payout versus last quarter’s 1.12x. This mark also puts KMI back in line with its average coverage ratio for 2013.
On the flipside, Kinder Morgan’s two master limited partnerships (MLPs) also managed some pretty impressive cash flow figures.
KMP reported distributable cash flows (DCF) of $693 million, or $1.55 per unit. That’s a whopping increase of 26% compared to the first quarter of 2013. The only negative piece to Kinder Morgan’s cash flows was EPB. El Paso managed to see a slight decline in DCF due to rate case settlements on its Southern Natural Gas and Wyoming Interstate pipelines.
Despite that slight 3-cent-per-unit decline in DCF, EPD still managed to raise its distribution by 5% to reach 65 cents per quarter. Likewise, KMI increased its dividend by 11%, while KMP saw its payout jump 5% on the backs of their quality numbers.
Story Still Getting Better For KMI & KMP
People invest in MLPs and midstream firms for one reason — dividends derived from cash flows. That’s why everyone freaked out and KMI stock shank hard when Barron’s ran its negative stories. However, it seems like those predictions about being a house of cards aren’t even close to being true for KMI. In fact, it has managed to grow its DCF pretty handsomely since the first pieces ran in the investing newspaper.
And the future seems pretty rosy for KMI and KMP stock as well.
That’s because Kinder Morgan has a ton of new projects and drop-downs ready to happen. As the sponsoring firm or general partner, KMI stock has been able to take advantage of the lucrative “drop-down” relationships with its MLP subsidiaries. By placing pipeline, storage and terminal assets into a MLP, KMI has been able to avoid taxes and receive generous distribution payments back from the MLPs.
This year, KMI is planning on dropping down interests in three midstream assets — including its Ruby Pipeline and Gulf LNG facility — into El Paso. At the same time, KMP has an organic project backlog of roughly $14.9 billion in new pipelines and midstream assets.
All in all, these projects will strengthen the long-term cash flows — and ultimately the dividends — at KMI and the two partnerships.
And with KMI stock trading for a forward P/E of 23, investors may want to snap up shares of pipeline player. While that valuation isn’t exactly dirt cheap, you’re paying a slight premium for the leading midstream firm in the nation. The premium is certainly warranted as Kinder Morgan continues to churn out cash flows and dividends back to shareholders. At the same time, both EPB and KMP stock yield more than 7% — a testament to their strength.
The bottom line: Kinder Morgan continues to do everything right when it comes to being a midstream firm.That means rising cash flows and dividends. For investors, that’s exactly what you are looking for in a boring pipeline company. The opportunity with KMI and KMP stock gets better with each quarter.
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As of this writing, Aaron Levitt was long KMI and Kinder Morgan Management LLC (KMR).