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Is Kinder Morgan’s Dividend Sustainable?

Kinder Morgan is projecting a dividend yield north of 8%.
Avery T. Phillips is a freelance human being with too much to say. She loves nature and examining human interactions with the world. Comment or tweet her @a_taylorian with any questions or suggestions.
Avery T. Phillips is a freelance human being with too much to say. She loves nature and examining human interactions with the world. Comment or tweet her @a_taylorian with any questions or suggestions.

Just two years ago, Kinder Morgan Inc. (KMI) slashed dividends by 75% in a bid to shore up its debt and manage its leverage so it could move forward. At that time, energy stocks were feeling great pressure from alternative energy sources as well as public perception. The company’s net debt to EBITDA ratio rose to as high as 9.0 during this period.

Recently, Kinder Morgan has increased its dividend projections, predicting dividends of $0.80 in 2018 and up to $1.25 by 2020. This increase of 60% and more may seem optimistic, as it comes on the heels of the 2016 dividend cut, but there are a few reasons to believe that the dividend projection is sustainable and may continue to grow in the foreseeable future.

Kinder Morgan Dodged a Bullet in the Form of MLP Taxation Changes

Kinder Morgan has long relied on the master limited partnership (MLP) style of putting distributable cash flow at the forefront of its concerns, but it hasn’t actually been an MLP since 2014, when the company bought out its public entities and became a true Schedule C corporation. That means that this year’s changes to MLP taxation, and the history of MLPs avoiding corporate tax costs, is likely to have little impact on Kinder Morgan directly.

The market at large seems slow to adopt pipelines and infrastructure investments, especially on MLPs, but Kinder Morgan appears to be well ahead of the fallout from this change. Not only did it bring down its debt ratio considerably, but it has already launched many of the projects that can secure its ongoing distributable cash flow in the future. Thanks to its 2017 initiatives, the future looks bright as long as Kinder Morgan can deliver on the capital outlays that it has already funded.

There’s Strong Support for Current Expansion Initiatives

The biggest hurdle for the company is also one of its strongest prospects. Kinder Morgan Canada Limited (KML:CA) has faced an uphill battle with the creation of the Trans Mountain Pipeline in the nation, but support from Canadian Prime Minister Justin Trudeau continues to grow. This initiative appears poised to add as much as $9 million to earnings each year to the company’s coffers.

In total, the company’s expansions could bring as much as $1.6 billion in revenues. Other expansions also appear to be on solid footing, with the Federal Energy Regulatory Commission (FERC) giving the go-ahead on Kinder Morgan’s pipeline changes in the Kentucky region, and a recent update notes that FERC will not interfere with the plan to stop moving gas through the pipeline and use it instead to move natural gas liquids (NGL), conceding that use of the infrastructure falls within the purview of the Army Corps of Engineers, not FERC itself.

Kinder Morgan Has a Better Than 8% Yield at Current Rates

At current stock pricing — $15.57 as of this posting — Kinder Morgan delivers a better than 8% yield with its projected dividends for 2020. That makes it one of the top dividend-paying stock choices for those relying on long-term investments, and its cash flow appears to be able to cover the increases in dividends over time. Kinder Morgan’s current yield, at only 3.3%, still lags behind competitors, including ONEOK (OKE), but it is poised to overtake the competition’s yield in the coming years. Both ONEOK and Kinder Morgan offer solid choices for dividend-focused investors in this sector.

The moves by Kinder Morgan in 2017 to tackle its interest-bearing liabilities and reduce its debt ratio to only 5.1% makes the company look like a smart choice that will be able to cover dividend projections going forward. This optimistic outlook is backed up by capital outlays already underway, and the plans to double dividends by 2020 appear sustainable at this time. Further resistance to expansion projects could slow or detract from that possibility, but those projects continue to gain steam and overcome regulatory and procedural hurdles, positioning Kinder Morgan for further growth in the future.