Kinder Morgan generates billions in cash flow while still growing future capacity.
Plenty of technology and artificial intelligence (AI) stocks are soaring in 2024. But every portfolio should have some diversity. Sometimes investors think that means giving up the potential for big gains in sectors like the tech industry in exchange for holding safer, dividend-paying stocks.
But one company paying a hefty dividend is also trouncing the S&P 500 index in 2024. Including dividends, the total return from energy infrastructure giant Kinder Morgan (KMI 0.52%) stock has, in fact, doubled the index year to date through mid-October. Even for those who missed its recent surge, there are still good reasons to invest in Kinder Morgan.
KMI Total Return Level data by YCharts
Cash flow is king
The run higher in Kinder Morgan shares comes from some fundamental success. The company’s operations generate enough cash flow to accomplish several things that make it a good investment. Most importantly for the long term, Kinder Morgan continues to fund promising capital projects from internal cash generation.
That includes its $1.8 billion STX Midstream acquisition from NextEra Energy Partners which closed late last year. Those assets include a group of pipelines connecting Texas’ Eagle Ford basin to the growing Gulf Coast and Mexican markets. It also consists of a recently activated midstream pipeline that connects to a new Eagle Ford pipeline Kinder Morgan placed in service in late 2023. This capital investment will pay off for investors for years with the majority of business underpinned by take-or-pay contracts and average contract lengths of over eight years.
The company also recently finalized a new investment of nearly $500 million to expand its Gulf Coast Express pipeline that will increase natural gas deliveries from the Permian Basin to South Texas markets. Importantly for investors, though, capital spending on midstream natural gas capacity is expected to be peaking this decade. That would mean even more returns available for shareholders in future years.
In the meantime, those growth investments are being funded by cash flow from operations that totaled nearly $3 billion over just the past six months. Even beyond that capital spending, the company generated $1.7 billion in free cash flow over that time. It’s using that excess cash to increase its dividend while keeping its debt level well below a previously announced target of 4.5 times net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). That metric has dropped by 26% since 2016 and is expected to reach 3.9 by year-end. That’s helped the company return the equivalent of about 41% of its recent market cap to shareholders in that time.
Broader energy trends
But it’s not all about those numbers. There are more general trends that have investors pushing Kinder Morgan shares higher, too. In its third-quarter report, chairman Richard Kinder stated, “With substantial projected increases in natural gas demand both domestically and globally in the coming decades, we have many opportunities on the horizon.”
Natural gas consumption in the U.S. has been steadily on the rise for years. Kinder’s statement is backed up by those existing trends as well as predicted increases in energy needs with the massive buildout of data centers for AI computing power and expanding use of electric vehicles.
Bet on the leader
Kinder Morgan’s pipelines already transport about 40% of U.S. natural gas production. That infrastructure is effectively irreplaceable. With Kinder Morgan, investors are getting the leader in a market in which it continues to heavily invest. And they are collecting a growing dividend along the way.
The dividend was cut significantly in 2016 as the company shifted to focus on improving its debt level and cash flow. But it has steadily increased the payout as those goals have been achieved. Even after the stock marched higher this year, the dividend yield is still a strong 4.6%.
It’s not too late to buy Kinder Morgan. Even if the stock doesn’t repeat its level of outperformance in the next year or two, the yield gives investors a nice rate of return in the short term. But the company is also in a good position to capitalize on future trends, and shareholders should reap the rewards of future capital gains, too.
Howard Smith has positions in Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
