Kinder Morgan Stock: Buy the dip before anyone else (NYSE:KMI)

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Kinder Morgan (New York stock market :KMI) released a strong third quarter report last week, which included an 11% year-over-year increase in distributable cash flow and a 7% year-over-year increase in EBITDA adjusted. In addition, the pipeline company confirmed its outlook for fiscal year 2022 – which Kinder Morgan raised in the second quarter of 2022 – and maintained a very low payout ratio based on distributable cash flow. Unfortunately, Kinder Morgan stock fell 5% the day after earnings, creating a buying opportunity for dividend growth investors who like to see a solid 6.3% dividend yield!

Strong Q3’22 balance sheet

The positive momentum in Kinder Morgan’s natural gas and CO2 businesses continued through the second quarter into the third quarter and both segments again delivered impressive results. The natural gas pipeline business generated $1.16 billion in profit in Q3’22, posting 6% year-over-year growth. The pipeline business is Kinder Morgan’s bread and butter and posted a 63% profit share in the third quarter (based on earnings before depreciation). Kinder Morgan’s CO2 segment also continued to perform well, with earnings growing 27% year-over-year to $195 million, mainly due to improved CO2 product pricing. Kinder Morgan’s adjusted EBITDA increased 7% year over year to $1.77 billion.

Source: Kinder Morgan

Source: Kinder Morgan

Kinder Morgan’s distributable cash flow increased 11% year-over-year to $1.12 billion due to broad-based strength across all business segments. Distributable cash flow is a much better number than earnings to focus on for midstream companies, as cash flow is less likely to be manipulated than earnings numbers.

Source: Kinder Morgan

Source: Kinder Morgan

A low payout ratio translates into safe dividend payments

Kinder Morgan’s dividend, which currently stands at $1.11 per share per year, is very safe since the owner and operator of the pipeline covers its payment with distributable cash flow. In Q3’22, Kinder Morgan paid out just over half, 56.6%, of its distributable cash flow, giving the midstream company the opportunity to increase its dividend payout and make new investments in its pipeline network.

KMI

Q3’21

Q4’21

Q1’22

Q2’22

Q3’22

Distributable cash flow

$0.44

$0.48

$0.64

$0.52

$0.49

Dividends declared

$0.27

$0.27

$0.28

$0.28

$0.28

DCF payment

61.4%

56.3%

43.4%

53.4%

56.6%

(Source: Author)

Due to the low payout ratio, I believe Kinder Morgan’s dividend is sustainable during a recession, which in itself has a lot of value for dividend investors.

Strong orientations for the 2022 financial year confirmed

Kinder Morgan confirmed its guidance for fiscal year 2022 and continues to expect $7.2 billion in adjusted EBITDA and $4.7 billion in distributable cash flow. Due to the strong performance of the company’s pipeline and CO2 businesses, Kinder Morgan said in the second quarter that it expects upside of up to 5% in its base case for adjusted EBITDA and free cash flow. distributable.

Source: Kinder Morgan

Source: Kinder Morgan

Attractive return and valuation

The most attractive aspect of Kinder Morgan is the 6.3% dividend yield combined with the low DCF-based payout ratio…which virtually guarantees that the dividend will continue to grow in the future. The current dividend is $1.11 per share per year, or $0.2775 per share per quarter, and Kinder Morgan said it plans to increase its dividend by 3% per year.

Chart
Data by Y-Charts

Kinder Morgan’s valuation is also attractive, but perhaps to a lesser extent than the high dividend yield. Kinder Morgan’s price fell 5% the day after third-quarter results, creating an opportunity to buy the company at a reduced valuation. Based on adjusted EBITDA expectations for next year ($7.53 billion), Kinder Morgan sells at an enterprise value to EBITDA ratio of 9.6X. Enterprise Products Partners (DEP), a major rival of Kinder Morgan in the pipeline industry, has a comparable Enterprise-Value-to-EBITDA ratio of 9.1X.

Chart
Data by Y-Charts

I As Enterprise Product Partners a lot because of the mid-company’s consistent dividend growth, higher yield, and slightly better valuation than Kinder Morgan.

Risks with Kinder Morgan

Kinder Morgan is a defensive investment for dividend investors, as the company provides essential energy products that customers need even as the US economy is weighed down by a recession. Additionally, Kinder Morgan poses regulatory risk as the fossil fuel industry is currently not a favorite of the US government seeking to advance green energy sources. If the US government continues to limit the expansion of mission-critical infrastructure that serves the fossil fuel industry, Kinder Morgan’s long-term growth prospects in the energy industry could be harmed.

Final Thoughts

Pipeline owner and operator Kinder Morgan is a downside buy. The company’s third quarter results were strong in terms of EBITDA and distributable cash flow growth, and Kinder Morgan also maintained a low payout ratio in Q3’22. The outlook for fiscal 2022 was also confirmed, making it even more difficult to understand why the stock price fell after earnings. Kinder Morgan’s valuation and dividend yield are attractive for investors seeking long-term exposure to the US energy sector!