Kinder Morgan (NYSE:KMI) unveiled a few surprises when it reported second-quarter results back on July 19. Not only did the pipeline giant declare a $0.125 quarterly dividend, but it said it planned a 60% dividend increase next year (to $0.20 per quarter), to be followed by 25% annual increases in both 2019 and 2020. As icing on the cake, KMI's board announced a brand-new $2 billion share repurchase program.
While the buybacks are not mandatory, the program does mean share count could fall, paving the way for even larger dividend increases. This, coupled with the already-planned hikes, means one thing and one thing only -- Kinder Morgan's stock might be in for a few very good years.
Good news for shareholders on multiple fronts
Kinder Morgan slashed its dividend by a whopping 75% in late 2015, from $0.51 a share per quarter to $0.125. The company's reputation took a lot of damage on Wall Street that day. What was especially difficult was that shares had held up reasonably well after energy prices began their slide in 2014, and Kinder's reputation as a dividend stock had been stellar leading up to the cut. After the announcement, many investors felt betrayed and abandoned the stock, and its price dropped precipitously.
In its 2017 second-quarter financial report, the company finally moved toward regaining the market's trust. Reactions were positive, at first, with KMI's shares rallying more than 6% in the days that followed the Q2 report. Since then, unfortunately, investors have apparently regained their pessimism about the company. This is a mistake; for those willing to look a little closer, the market's lack of faith will likely prove to be a golden opportunity.
While these planned dividend increases are just that, at least for now, the fact remains: Kinder Morgan's financial situation has stabilized. Now, it can finally shift from playing defense to playing offense.
Management rightly noted when they announced the share buyback program that the company's share price to distributable cash flow (DCF) ratio currently stands at just below 10. This is low for KMI by historic standards, and also relative to its peers. Should it remain here, there's a good chance Kinder will buy back shares -- especially in light of the fact that the debt markets have begun looking upon Kinder much more kindly as of late. For example, its 7.4% senior unsecured notes due March 15, 2031, currently trade at 124% of par and sport a yield-to-maturity of just 4.89%. Quite a change from the yield these same bonds sported when credit for all companies in the energy sector dried up in 2015:
It should also be noted that the very reason for the 2015 dividend cut that left the market so jaded was Kinder Morgan's lack of access to credit markets. Debt investors simply cut off the entire energy sector, leaving KMI with a choice: project expansions or its precious dividend. It made the right decision. But now the credit situation has normalized, and Kinder Morgan has a lot of cards it can play.
As the Motley Fool's own Matt DiLallo pointed out back in July, management's plans represent "an opportunity to be opportunistic." Kinder could continue to expand its impressive asset portfolio. It could pay out heftier dividends, or buy back its own stock should share prices continue to languish. Heck, it could do both by tapping debt markets should current interest rates continue to prevail. There's a lot that a company like Kinder can do with money at less than 5%. No matter what, shareholders win.
Foolish bottom line
Wall Street continues to be tepid about Kinder Morgan's stock. This is understandable; its dividend was thought to be rock solid, and then it crumbled. However, the Kinder of today is an entirely different animal than the one that cut its payout. No matter which card it plays, shareholders will likely come out winners in the long run. With management projecting an annual dividend of $1.25 per share in fiscal 2019, and the stock now trading at just below $20, Foolish investors would be wise to give Kinder Morgan a very close look.