In previous articles I've written about Kinder Morgan's (KMI 0.21%) recently announced merger with its MLPs: Kinder Morgan Energy Partners LP (NYSE: KMP), Kinder Morgan Management LLC (NYSE: KMR), and El Paso Pipeline Partners LP (EPB), and why I think it makes Kinder Morgan Inc a phenomenal dividend growth investment over the coming years. I also introduced investors to the quarterly conference call, which is a great resource for better getting to know an investment, both at a company-specific level and for learning about broader industrywide trends that fuel the fundamental investment thesis.
Recently, Kinder Morgan and its MLPs have experienced a pullback in price, declining 6%-8% from the highs experienced just after the merger announcement.
This may be partially due to the recent retreat in energy prices (natural gas have fallen 13.8% in the past six months); however, I'd like to explain three reasons this price decline represents an excellent long-term buying opportunity for Kinder Morgan.
Growth in demand/supply of gas is a long-term megatrend
Source: Kinder Morgan June 12, 2014, investor presentation.
As this table illustrates, U.S. demand for natural gas over the next decade is expected to soar 36% because of strong growth in liquified natural gas (LNG) exports and America's continued switch to cleaner, safer natural gas power generation.
Supplying the demand will be megashale gas formations such as the Marcellus and Utica shales, which have experienced mind-blowing production growth of 15-fold and 10-fold within just the past seven and two years, respectively.
Source: EIA July drilling productivity report.
As Kinder Morgan's table shows, the production from these formations is expected to grow an additional 112% over the next decade, forcing a massive amount of new investment in midstream (gathering, transport pipelines and processing plants) infrastructure. In fact, as Kinder Morgan pointed out its latest conference call, the Inga Foundation estimates that $114 billion will need to be spent on gas infrastructure alone in just the next five years.
That's part of a larger, $890 billion megatrend of energy investment through 2026 that explains why Kinder Morgan's $17 billion backlog could more than double because of $18 billion in potential projects the company is investigating, as explained by my Motley Fool colleague Matt DiLallo.
Kinder Morgan's merger prepares the company for cheaper, faster growth
According to Kinder Morgan's management, the merger substantially reduces Kinder's cost of capital by eliminating Kinder Morgan Energy Partners' and El Paso Pipeline Partners' incentive distribution rights and subordinated debt. It also saves the company a fortune on taxes over the next 14 years -- $20 billion, to be exact.
The streamlined Kinder Morgan will also be in a stronger position to use its shares as currency for continued accretive acquisitions, as part of a plan to what company President, CEO, and founder Richard Kinder calls "pursue expansion and acquisitions in a target-rich environment."
Just how big of an environment are we talking? Well, between now and 2035, $640 billion in midstream energy investments is expected to take place, and currently there are 120 MLPs with total enterprise values of over $875 billion. Thus, Kinder Morgan has a potential $1.5 trillion ocean to expand into, giving this high-yielding dividend stock plenty of growth in its future.
Dividend growth could be a major return booster
This remarkable chart illustrates both the incredible power of dividend/distribution growth investing and the importance of reinvesting those dividends/distributions. Over the past 24 years, units of Kinder Morgan Energy Partners have appreciated 12.19% in price compared with the S&P 500's 8.61% annual total return (including dividend reinvestment). However, with distribution reinvestment, Kinder Morgan Energy Partners' returns soar to 31.58% annually. To put that in perspective, that difference, between reinvesting distributions and not, comes to $577,000 on a $10,000 investment made in 1990.
Kinder Morgan has said it intends to raise its dividend 16% in 2015, pending the closing of the merger by the end of the year, with 10% growth through 2020.
On Sept. 25, Kinder Morgan said it had secured a $4 billion revolving credit facility, expandable up to $5 billion, to act as a bridge loan to help it complete the buyout of its MLPs. This moves the merger closer to completion and Kinder Morgan shareholders closer to their strong dividend growth.
Given that Kinder Morgan and its MLPs have met or exceeded dividend/distribution guidance in 18 of the past 19 years, a 95% success rate, and given the megatrend fueling the industry's growth, I am very confident that management can deliver on this dividend growth guidance. This would place 2020's dividend payout at $3.22 a share and gives a five-year forward yield of 8.4% based on today's prices.
This kind of dividend growth not only is likely to result in excellent income, but also increases the chances of fueling market-crushing total returns.
Bottom line
Kinder Morgan represents one of the bluest of the midstream energy blue chips, with a strong, consistent, and long track record of growing both the company and its dividends/distributions. Going forward I anticipate this trend to continue, which is why I believe that Kinder Morgan is one dividend growth stock that should be on your radar, if not in your portfolio.
