It’s no secret that the last few years haven’t been so kind to shareholders of Kinder Morgan Inc (NYSE:KMI). Since its conversion from an MLP to a straight c-corp, Kinder Morgan stock has been on a straight shot down. Much of that comes from the firm’s painful dividend cut back in 2015. And since that time, KMI hasn’t exactly regained investors’ trust.
After all, fool me once, shame on you. Fool me twice, shame on me.
But this time, investors may want to trust KMI. Kinder Morgan has made some good progress on its turnaround, and the firm is finally starting to add to organic and new projects to fuel distribution and cash flow growth. For investors, the time could be right to finally place a bet with the pipeline and midstream giant once again.
When your stock is a dividend stock held primarily by retirees and other income seekers, the worst thing you can do is cut your dividend. So when Kinder Morgan cut its historically steady payout by 75% back in 2015, it was pretty much game over for Kinder Morgan stock. KMI stock has pretty much floundered since then.
But that cut was necessary. KMI’s cost of capital for new expansion efforts was getting very expensive. That was one of the prime reasons for making the switch from a master limited partnership (MLP) in the first place.
With oil prices in the basement, it became harder for Kinder Morgan to keep raising enough money cheaply to finance its expansion projects. Remember, when you’re one of the biggest midstream firms on the planet, it takes some big projects to really move the needle.
So, the dividend cut at KMI was a necessary evil. And that cut seems to be working. Kinder has continued to see decent cash flow generation from its vast array of pipelines, storage and other energy logistics assets. Net debt has dropped, while the firm has expanded the amount of cash on its balance sheet.
Again, the money for the dividend was there, and the cut wasn’t because the underlying businesses were too stressed or performing badly. This was mostly a case of reducing its costs and realigning itself in a positive manner.
The biggest beneficiary in all of this has been Kinder Morgan’s CAPEX spending for new projects. The firm has been able to fund expansion efforts without tapping the debt or equity markets. The latest example of this has been KMI’s new 500-mile pipeline in the Permian Basin.
The Permian Basin has been a low-cost hotbed of E&P action, and much of that drilling has focused on shale oil. But at the same time, drillers have been producing a ton of natural gas, much of which has been flared or discharged off.
Sensing a major opportunity, KMI recently announced a new $1.7-billion pipeline to bring natural gas from the Permian down to the Gulf Coast. This brings the gas right where firms like Phillips 66 (NYSE:PSX) and Cheniere Energy, Inc. (NYSE:LNG) have chemical-refining facilities and LNG export capabilities.
That new project joins the other $10.2 billion in projects on KMI’s backlog list that should help supply it with an extra $1.5 billion in incremental earnings as they join the firm’s system.
What does the new gas pipeline as well as the ability for KMI to finally add more assets to its system using its cash flows mean? Bigger dividends of course.
With the cash flows from the new pipelines and projects, as well as Kinder Morgan’s better balance sheet, the midstream giant should be able to significantly boost its dividend.
Internally, KMI estimates that it will produce around $4.57 billion in distributable cash flow (DCF) for all of 2018. That will allow it to raise its dividend by 60% next year. Moreover, with the extra projects coming online, Kinder Morgan estimates it will be able to raise its payout by 25% in 2019 and 2020 as well.
But here is the real kicker. KMI is now throwing off so much cash, and turnaround plans have worked so well, that it even has enough money to buy back shares. Kinder Morgan will begin a $2-billion buyback program and seek to reduce its share count by over 5%.
For long-suffering shareholders of Kinder Morgan stock, KMI’s improving cash flows, dividend growth and expanding asset portfolio is exactly what they should want to see. Yes, the dividend cut was painful, as was the decision to eat its own MLP. But this clearly was the right choice. Today’s Kinder Morgan is much better than yesterday’s.
And that could mean that it’s time to double down and add to your positions.
For newer investors, KMI is quickly emerging as one of the best dividend growth stories in the energy sector. The firm’s improved balance sheet and cash flows make it a top choice for adding rising income to your portfolio.
In the end, KMI is once again regaining investors’ trust, and that makes Kinder Morgan stock a great buy for everyone.