Kinder Morgan's (NYSE:KMI) stock has been on a seemingly unending slide, slumping 12.7% last year, pushing its three-year decline to 55%. That deep drop came even though the company's cash flow has barely budged, down just 7% on a per share basis from the peak in 2015. It's a discrepancy that seems to really bother co-founder and Executive Chairman Richard Kinder, who also happens to be the company's' largest shareholder. That was apparent from his comments on the pipeline giant's recent fourth-quarter conference call, where he again criticized the wide divergence between the company's underlying performance and its stock price.
We're doing a lot with our cash flow
Kinder kicked off his comments on the call by saying that,
The financial results we are reporting today for both the fourth quarter and full year 2017 demonstrate once again the strong cash flow generated by KMI. Equally importantly, we are living within that cash flow, paying our dividend which will increase this year by 60%, funding all of our expansion CapEx and returning additional value to our shareholders through our stock buyback program while continuing to improve our balance sheet, all with internally generated funds. To me, as the Chairman and the largest shareholder, this seems like a recipe for success, both now and for the foreseeable future.
Kinder pointed out that Kinder Morgan generated gobs of cash flow both in the fourth quarter and full year. In fact, despite several headwinds, the company pulled in $4.48 billion, or $2.00 per share, of distributable cash flow (DCF) in 2017, which beat its guidance of $4.46 billion, or $1.99 per share. The company spent roughly $3 billion of that money on expansion projects, paid $1.1 billion in dividends, and had about $380 million left over, with it using $250 million of that to accelerate its share repurchase program by a month. On top of that, it ended the year with a lower leverage ratio than expected.
In other words, the company did everything it said it would do last year, and then some. Meanwhile, it's on pace to continue living within cash flow this year, with plans to invest $2.2 billion on growth projects and pay out 60% more in dividends, with plenty left over to keep buying back shares. It's a recipe that Kinder firmly believes will prove to be a success in the years to come.
Our stock is ridiculously cheap
That said, the market hasn't yet given the company any credit for its recent achievements, with Kinder lamenting that,
...[N]otwithstanding that good performance, our world-class set of assets and the positive steps we have taken by improving our balance sheet and preparing to return additional funds to our shareholders through the dividend increase I mentioned, our stock continues to trade at a substantial discount to our peer group and I certainly hope and expect that discrepancy to be overcome as we continue to meet our targets and return value to our shareholders.
As Kinder notes, despite everything the company has going for it, shares trade at a significant discount to rivals. In fact, with the stock recently below $19 a share, it sells for around 9.3 times 2018 DCF, while its peer group average is 14.9 times DCF. It's a head-scratching discount considering that Kinder Morgan expects to deliver best-in-class dividend growth along with top-tier coverage in the next three years, all while self-funding growth and repurchasing shares.
Contrast this with rival Targa Resources (NYSE:TRGP), which anticipated that it might just generate enough cash flow to cover its dividend last year. Because of that, Targa needed to access outside funding to bridge any gap and finance its expansion projects, leading it to sell $1.5 billion in stock last year. That said, despite this weaker financial position, Targa Resources trades at more than 14 times DCF. It's an unjustifiable premium to where Kinder Morgan trades, which is why the pipeline giant has started to use some of its excess cash to repurchase its dirt cheap shares.
Something must give
Richard Kinder believes his company is following a formula that should create significant shareholder value in the coming years. He hopes that as it continues delivering on the promised plan, that the stock will eventually catch fire and begin trading closer to the peer-group average. If not, then Kinder might need to do something drastic, including possibly taking the company private once again.