Kinder Morgan's Solid Foundation: Analyzing the Safety and Growth of Its Big-Time Dividend

Friday, 19 April 2024, 11:12

Kinder Morgan continues to offer a secure and growing income stream with a 6.4% yield and a conservative dividend payout ratio. The company's first-quarter results demonstrate its ability to steadily produce cash flow and maintain a strong balance sheet. With a focus on stable cash-flow sources and expanding operations, Kinder Morgan remains an excellent choice for investors seeking a reliable passive-income option.
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Kinder Morgan's Solid Foundation: Analyzing the Safety and Growth of Its Big-Time Dividend

Steady Cash Flow and Dividend Growth

Kinder Morgan generated $1.4 billion of distributable cash flow in Q1, covering its high-yielding dividend increase. The company's stable cash flow and diversified revenue sources provide a solid foundation for its dividend growth.

Operational Performance

  • Earnings rose across core segments, with natural gas pipeline earnings up 7% and product pipeline operations surging 17%.
  • Strong financials:$1.15 annualized). That marked the company's seventh straight year of increasing its dividend.

    The pipeline company continues to produce very stable and growing cash flow. Roughly 68% of its earnings come from take-or-pay and hedging contracts, which lock in its revenue. Most of its remaining earnings come from long-term, fee-based contracts, limiting its exposure to commodity price volatility.

    Meanwhile, its stable cash-flow sources are growing as the company expands its operations. Kinder Morgan delivered earnings growth across 3 of its 4 operating segments in the first quarter:

    Earnings in the company's core natural gas pipeline business rose 7% year over year. Fueling that improvement was higher margins from its storage assets, higher volumes from its gathering systems, and the acquisition of STX Midstream.

    Kinder Morgan's products pipeline operations had a standout quarter, with earnings surging 17%. The company benefited from higher rates on existing assets and contributions from recently completed capital projects. Finally, earnings from its terminals rose 6%, driven by liquids terminals expansion projects and higher rates on its Jones Act terminals.

    The earnings growth from those three segments more than offset the 4% earnings decline from its carbon dioxide business. The main drag was lower carbon dioxide sales volumes. Commodity price movements largely offset each other. Likewise, lower crude oil volumes offset higher natural gas liquids output.

    Kinder Morgan produced nearly $1.2 billion in cash flow from operations during the first quarter. It paid out about half that money in dividends ($631 million) and used about half to fund capital expenses ($619 million). That left it with a slight shortfall ($61 million) that it easily covered with its strong balance sheet.

    Kinder Morgan ended the period with a 4.1x leverage ratio, well within its 3.5x-4.5x target range. That supported the company's investment-grade credit rating.

    On track for another solid year

    Kinder Morgan's solid showing in the first quarter kept it on track to achieve its full-year guidance forecast. The natural gas pipeline company expects to produce about $5 billion, or $2.26 per share of DCF. That would put its dividend payout ratio at around 51% this year, which is very conservative for a company producing such stable cash flow.

    As a result, it should generate a little less than $2.5 billion in excess free cash flow that it can use to fund capital projects and maintain its strong financial flexibility. It expects capital spending to be at the upper end of its $1 billion-$2 billion annual range in the near term.

    The company ended the first quarter with $3.3 billion of committed capital projects in its backlog, an increase from $3 billion at the end of last year. Kinder Morgan continues to find high-return expansion projects, with the bulk (80%) focused on lower-carbon energy like natural gas, renewable natural gas, and renewable fuels.

    The midstream company's growing earnings and projected excess free cash flow drive its view that it will end this year with a 3.9x leverage ratio. That gives it additional financial flexibility to make opportunistic acquisitions or share repurchases.

    An extremely solid dividend stock

    Kinder Morgan generates very durable cash flow that steadily rises. That enables the pipeline company to pay an attractive dividend, invest in its continued expansion, and maintain a strong balance sheet. Those features put its big-time payout on a firm foundation, making Kinder Morgan an excellent option for those seeking to collect a steadily rising passive-income stream.


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