Kinder Morgan (NYSE:KMI) has been a rather abysmal investment since it reemerged on to the public seen in 2011 from a leveraged buyout in 2007. Overall, the stock is down more than 20% even after factoring in dividends. Driving the decline has been the impact of the legacy leverage from that privatization, as well as the additional debt it took on when it gobbled up its MLPs in 2014. The consequence of that leverage came to a head in late 2015 as the worsening oil market downturn forced the company to slash its dividend so it could protect its coveted investment-grade credit rating.

However, since that time Kinder Morgan has undertaken several strategic initiatives that have vastly improved its financial situation. As a result, the company is back on solid ground and has visible growth prospects ahead of it that have the potential to create tremendous value for investors as the energy market begins to heal. That upside, when combined with several other factors, makes it the best buy in the sector in my opinion.

Pipeline with a mountain background.

Image source: Getty Images.

A hidden gem for income investors

When Kinder Morgan slashed its dividend 75% in late 2015, it lost its attraction for most income-focused investors. That lack of appeal still holds true today since the company currently yields just 2.6%, which isn't that much higher than the S&P 500's 1.9% current yield. That said, the company recently unveiled a new dividend policy, which will see it boost the payout 60% next year and by 25% in both 2019 and 2020. If the company makes good on that promise, it implies a future yield of 6.5% for investors who buy today.

While investors can pick up higher yields in the pipeline sector, some of those dividends come with more risk because these companies pay out a larger percentage of their cash flow. Here's a look at how the company compares to several non-MLP rivals:

Pipeline stock Current Dividend Yield Payout ratio Growth forecast
Enbridge (NYSE:ENB) 4.59% 50% 15% in 2017 and by 10% to 12% through 2024
Kinder Morgan 2.62% 25% 60% in 2018 and 25% in both 2019 and 2020
ONEOK (NYSE:OKE) 5.52% 80% 21% in 2017 and by 9% to 11% through 2021
Targa Resources (NYSE:TRGP) 8.32% 100% N/A
TransCanada (NYSE:TRP) 3.67% 50% 8% to 10% through 2020

Data source: Yahoo!Finance and Enbridge, Kinder Morgan, ONEOK, Targa Resources, and TransCanada.

One thing that's worth noting about Kinder Morgan's dividend forecast is that its 2020 dividend would still only consume about 60% of current cash flow.

Visible near-term growth with tremendous long-term potential

Given that Kinder Morgan can already fund its anticipated 2020 dividend level, the company doesn't need to grow to achieve that objective. That said, it has a massive backlog of capital projects that should expand cash flow over the coming years. According to the company's projections, it has $10.4 billion of fee-based pipeline and terminal projects that should enter service during the next five years. Since long-term fee-based contracts back that portion of the backlog, the company expects to generate more than $1.5 billion of incremental adjusted earnings before taxes, interest, depreciation, and amortization (EBITDA) by 2021 as these assets enter service, assuming everything goes according to plan. That's more than 20% growth from its current level. Meanwhile, the company has additional upside because it also plans to invest $1.8 billion over the next five years on high return projects in its carbon dioxide segment. Assuming a modest rebound in oil prices to $60 a barrel by 2019, distributable cash flow from this segment could expand from less than $800 million annually to more than $1 billion per year by 2019.

Further, there's ample growth potential beyond the projects currently identified in the company's backlog. For example, Kinder Morgan is in the early stages of developing a more than $1 billion natural gas pipeline project in the Permian Basin that could enter service in the second half of 2019. That's just one of several opportunities that have the potential to fuel robust organic growth. In fact, according to one estimate, North American energy companies will need to invest $26 billion per year through 2035 on new energy infrastructure, with 60% of that spending likely geared toward natural gas pipelines, which is Kinder Morgan's core business.

A person in a hardhat standing near a stack of pipelines.

Image source: Getty Images.

A bargain basement price in today's heated market

Typically, a company that offers investors a healthy dose of growth and income would sell for a premium price. However, that's not the case for Kinder Morgan because it has yet to recover from the impact of the oil market downturn. Because of that, the company currently sells for less than 10 times distributable cash flow. That's nearly 50% off its peak valuation of a few years ago, and well below the mid-teens price-to-distributable cash flow ratio that most pipeline stocks trade at these days. In fact, within its peer group, Targa Resources is currently the cheapest at about 12 times distributable cash flow while ONEOK, TransCanada, and Enbridge all sell for more than 15 times. Further, while some MLPs trade at cheaper valuations, those companies still have issues to address and therefore deserve to sell for lower prices.

The total package

Kinder Morgan might not have the highest current yield, greatest growth potential, or cheapest valuation. However, what it does offer is an excellent combination of all three factors. That complete package sets it apart as the best opportunity to earn a compelling total return in the pipeline sector over the coming years.

Matthew DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Enbridge, Kinder Morgan, and ONEOK. The Motley Fool has a disclosure policy.