Investors typically classify most stocks in three distinct categories: income, growth, and value. While there is often some overlap between these groupings, it's rare to find a stock that can satisfy the needs of investors in each of these categories. One of those rare finds is natural gas pipeline giant Kinder Morgan (NYSE:KMI). Not only does it offer an above-average dividend, but it has visible growth prospects, all of which investors can buy for a pretty low price these days.
Decent income, with more on the way
When Kinder Morgan released its 2017 financial expectations at the end of last year, the company said that it forecasted paying out $0.50 per share in dividends this year. With its recent stock price at about $19 per share, that payout implies a current yield of 2.65%. While that might not make some income investors drool, it is above the 1.9% average for stocks in the S&P 500. Furthermore, that payout appears to be on solid ground since 91% of the company's cash flow comes from fee-based assets, it has an investment-grade credit rating with improving leverage metrics, and the dividend only consumes about a quarter of the company's expected $1.99 per share in distributable cash flow.
The payout could also be heading meaningfully higher in 2018 since the company said that it would likely use a significant portion of future excess cash flow to increase the dividend once it completes its current slate of strategic initiatives. The pipeline giant just recently achieved the last of those objectives when it completed the IPO of its Canadian unit. Because of that, many analysts anticipate that Kinder Morgan could start paying out as much as half its cash flow starting next year, which matches the payout rates of fellow energy infrastructure giants TransCanada (NYSE:TRP) and Enbridge (NYSE:ENB). That implies a roughly 100% increase from current levels, suggesting that the company could be a gold mine for income investors.
Significant growth in the forecast
One of the reasons Kinder Morgan currently only pays out a quarter of its cash flow is that it has several large growth projects in development, which it's financing with internally generated cash flow. Overall, the backlog stands at $11.7 billion, including $10.3 billion of fee-based pipeline and terminal projects. Those projects alone should supply the company with $1.5 billion of annual adjusted EBITDA once its Trans Mountain Expansion project enters service in late 2019 according to its projections, with further upside from the high-return oil projects it's developing. That represents more than 20% earnings growth for a company that expects to produce $7.2 billion in adjusted EBITDA this year.
In addition, the company has several other growth projects in development, including the potential to build a more than $1 billion natural gas pipeline in the Permian Basin with DCP Midstream (NYSE:DCP). If approved, the DCP Midstream partnered project would enter service in the second half of 2019, further boosting earnings by the end of the decade. Meanwhile, due to growing energy supplies and demand, the industry is expected to invest $26 billion annually in new energy infrastructure projects in the U.S. and Canada through 2035, which suggests that Kinder Morgan should have plenty of expansion opportunities ahead of it.
Growth and income for a value price
Typically, a company that offers healthy income and visible growth would sell for a premium price. However, Kinder Morgan only trades at 9.5 times expected 2017 distributable cash flow. That's much cheaper than Enbridge, which currently sells for 13.6 times projected 2017 cash flow from operations, and the even pricier TransCanada that trades at 17 times expected cash flow.
Two factors drive the company's cheaper price. First, both TransCanada and Enbridge not only pay a higher dividend but offer clear growth forecasts, which is something income investors highly value. For example, Enbridge expects to boost its payout 10% to 12% annually through 2024 while TransCanada sees its payout rising 8% to 10% annually through 2020. Kinder Morgan, on the other hand, doesn't expect to release a revised dividend forecast until later this year. That uncertainty is likely weighing on the valuation.
Nearly all the growth projects supporting the forecasts of TransCanada and Enbridge are also under construction or highly likely to move forward. Contrast that with the largest project in Kinder Morgan's backlog -- the $5.4 billion Trans Mountain Pipeline expansion in Canada -- which faces intense opposition from local governments as well as environmental and other groups. Because of that, there is a higher risk that the project might face delays. That said, it has the full support of the country's prime minister, which is noteworthy because of his pro-environment stance, suggesting a high likelihood of getting built.
Those two uncertainties will likely continue weighing on the stock over the next several months. That said, this pressure could lift by the end of this year since Kinder Morgan expects to start construction on the Trans Mountain Pipeline expansion this fall and release a revised dividend policy later this year. If construction happens on time and the dividend increase meets expectations, Kinder Morgan's stock could move higher and trade closer to the mid-teens valuation of its peers, which is where it was just a few months ago.
With an above-average dividend, visible growth prospects, and a cheap valuation, Kinder Morgan has all the qualities an investor could want in a stock. The company's cheap price, however, might not last for too much longer since the two issues currently weighing it down could get resolved by the end of this year. Investors therefore might want to pounce before the stock rebounds and begins trading at the premium valuation it deserves considering its growth and income potential.
Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Enbridge and Kinder Morgan. The Motley Fool has a disclosure policy.