The stock market hates Kinder Morgan (NYSE:KMI). The natural gas pipeline company's stock -- which once traded north of $40 per share -- has been languishing at less than $20 per share for nearly a year. And recent moves by the company to reward shareholders haven't moved the needle much.
But that could mean the stock is ripe to outperform. Could this beaten-down pipeline company turn a modest investment into a cool million dollars by rocketing back to growth? Let's take a look and find out.
Don't bring me down
Investors were justifiably angry with Kinder Morgan in 2016, when management cut its dividend by more than 75% to free up cash. That move sent shares tumbling. Since then, the company has made some progress cleaning up its balance sheet and improving its operations, but the market has still been giving it the cold shoulder.
It hasn't helped that, in general, pipeline stocks have been having a rough couple of years. This is partly due to an overall industry slump, but different stocks have been hit for different reasons. For example, Enbridge (NYSE:ENB) took on a huge debt load to acquire Spectra Energy and weathered concerns about its cash flow. TransCanada (NYSE:TRP), on the other hand, was forced to cancel its Energy East and Eastern Mainline pipeline projects, which would have juiced long-term growth.
Pipeline companies are lagging the market even as domestic petroleum demand continues to increase. In May, the American Petroleum Institute reported that to date in 2018, U.S. petroleum demand was at its highest level in 11 years. But you'd never know that from looking at pipeline stocks:
If Kinder Morgan is going to make its investors into millionaires, it's going to have to do a lot better than that.
As good as it gets
In spite of its industry's lackluster performance -- not to mention its own -- Kinder Morgan turned in impressive first-quarter results in 2018. In particular, the company churned out an impressive amount of cash. Cash flow was up 3% year over year, and the company was able to raise its dividend by 60% and still have $804 million left over. Plus, the company's Canadian subsidiary will be receiving about $3.5 billion for the sale of its Trans Mountain Pipeline to the Canadian government.
That sounds like a lot, until you consider that the company is carrying $37.8 billion in long-term debt, which translates to about 6.2 times EBITDA. Even though that's in line with its industry peers -- TransCanada's debt is 6 times EBITDA while Enbridge's is an eye-popping 10.8 times -- this could be a problem for the company's growth.
The two primary ways to substantially grow revenue in the pipeline business are to build new pipelines or to make acquisitions. And both of those require up-front capital, which usually means taking on debt. But with so much debt already on the balance sheet, taking on more would almost certainly trigger a credit downgrade. True, Kinder Morgan's currently fat wallet could help finance some smaller projects, and it has several expansions in the works. But the long-term picture is definitely fuzzier.
So if Kinder Morgan is able to get its debt under control and continue churning out cash like it did last quarter, would that put it in millionaire-maker territory? History suggests otherwise. From the company's IPO in 2011 to its peak in April 2015, its share price only increased by 42%. Even factoring the dividend into the mix, the stock only generated returns of 65.6% over that four-year period, roughly a 13.4% compounded annual growth rate (CAGR). At that rate of return, to turn even a $100,000 investment into $1 million, you'd have to wait more than 18 years. Now, a tenfold return over that time isn't terrible, but it's probably not what most people have in mind when they think "millionaire maker."
Not quite a million bucks
Kinder Morgan looks like a company with a bright future, thanks to the moves it's making to continue to clean up its balance sheet and reward its shareholders through an increased dividend and possible share buybacks. Its operations are likely to benefit from increased North American shale production, and its "toll booth" revenue model should keep the cash flowing in.
But the company just doesn't seem likely to grow fast enough to turn a modest investment into a million bucks. An investment in Kinder Morgan makes sense as part of a diversified portfolio, but if you're looking for explosive growth, there are better stocks to consider.