This past July, Kinder Morgan (NYSE:KMI) announced plans to significantly increase cash returns to shareholders starting next year. The pipeline giant said it would raise its dividend 60% in 2018 and provide 25% increases in both 2019 and 2020 as well as repurchase up to $2 billion in stock. Fueling this massive return of capital is the company's decision to increase the percentage of cash flow it pays out each year and the $12.2 billion of growth projects it expects to place into service over the next few years.
That said, the company recently experienced a setback on its planned Trans Mountain Pipeline expansion in Canada, which is the largest of those growth projects, at $5.7 billion. That's after Canada's National Energy Board (NEB) told the company's Canadian subsidiary, Kinder Morgan Canada Limited (TSX:KML) to stop some preliminary work on the project, which the company said could delay it by a full year. While there is some concern that this could affect Kinder Morgan's dividend growth plans, it does have some levers to pull that could keep it on track.
The backfiring blog post
Last month, Kinder Morgan posted a blog on its public site showing that it was installing mats in streams to discourage fish from spawning in areas near the expansion project. However, because the company didn't have all the approvals necessary to start construction, the NEB said it needed to stop these activities until it has them. Thus far, the only piece of the project it has permission to work on is the expansion of a coastal marine terminal.
In Kinder Morgan Canada's view, the installation of these anti-fish spawning mats is crucial to its ability to start the project on time. That's because the company needs them in place before construction starts to ensure that fish don't get harmed. Given the tight timeline, it needs to get them installed now, or it might need to wait until this time next year, which could delay the company's construction activities in these sections and push back the in-service date of the project well past its current late 2019 estimate. That timeframe is worth noting because it seems to coincide with the planned 25% dividend hike in 2020.
Here's how it could stay on track even if the project goes off the rails
That said, while the expected surge in cash flow from the Trans Mountain Pipeline expansion is vital to Kinder Morgan's future, a delay in the start-up of the project wouldn't necessarily affect the company's dividend growth plans. That's because the company can already afford 2020's expected dividend outlay within current cash flow.
For perspective, even if earnings don't budge from here, the 2020 dividend would only consume 64% of distributable cash flow. While that's above the company's current expectation that it will maintain a payout ratio of less than 50% going forward, the higher rate isn't out of line with the guidance of its peers. For example, Enbridge (NYSE:ENB) expects its payout ratio to be between 50% to 60% of cash flow going forward, while ONEOK (NYSE:OKE) expects to pay out more than 80%. Further, Kinder Morgan has a built-in cushion given its $2 billion stock buyback authorization. It could use that money to reduce shares outstanding, and therefore the total dividend outlay, or as a bridge to support the increase in 2020.
Another factor to consider is that Kinder Morgan could at least partially offset a delay in Trans Mountain with other growth projects. For example, the company is currently developing the Gulf Coast Express Pipeline with DCP Midstream (NYSE:DCP). The more than $1 billion natural gas pipeline could enter service as soon as the second half of 2019 if the partners get the customer support and regulatory approval needed to build the project. That timeframe is worth noting because it lines up with when Trans Mountain would enter service.
Meanwhile, the company certainly has time to secure additional projects that could still come online in time to help bridge the gap. For example, ONEOK and DCP Midstream recently won more than $300 million of projects apiece that they can bring online by the end of next year. Meanwhile, Enbridge added 3.6 billion Canadian dollars' ($2.9 billion) worth of projects to its backlog that should start up between the second half of next year and 2020.
No cause for concern
One of the biggest weights holding down Kinder Morgan's stock price is the uncertain future of the Trans Mountain Expansion project, which faces intense opposition due to its potential impact on the environment. That said, even if the company experiences a significant delay in completing this project, it isn't likely going to affect the plan to rapidly increase the dividend over the next few years because the company can already afford that outlay, and it has time to backfill its backlog to help bridge the gap. That's why I wouldn't be too worried about this or any future setback on the project.
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.