Kinder Morgan (NYSE:KMI) recently unveiled its financial expectations for 2019. Not only does the gas pipeline giant anticipate that its cash flow will rise sharply in the coming year, but it expects to give investors another big-time dividend increase even as its financial profile continues to improve. That outlook suggests 2019 should be an even stronger year for the pipeline company.
Drilling down into Kinder Morgan's 2019 forecast
Kinder Morgan expects to generate about $5 billion, or $2.20 per share, in distributable cash flow (DCF) in 2019, or increases of 10% and 7%, respectively, over 2018's budget even though it sold the Trans Mountain Pipeline in Canada earlier this year. The forecast implies that the company's growth engine is accelerating considering that it anticipated a 3% increase in DCF in 2018, though it's on pace to easily exceed its budget. It's also worth noting that Kinder Morgan's DCF per share would surpass its previous record of $2.14 set in 2015.
Much of that accelerated growth will come from the company's natural gas infrastructure segment, where two major projects should be completed next year. The largest is the $1.2 billion Elba Island LNG Export Terminal, which the company expects to finish in phases starting in the first quarter. In addition, the company plans to complete the Gulf Coast Express (GCX) gas pipeline by October of next year. Kinder Morgan will fund 50% of that $1.75 billion project, though Apache (NASDAQ:APA), a major shipper on the pipeline, has the option to buy a 15% stake in GCX from Kinder Morgan upon completion.
What Kinder Morgan plans to do with the cash flow
As noted, Kinder Morgan expects to produce about $5 billion in cash over the next year. The company plans on paying out roughly 45% of that money, or about $2.3 billion, in dividends, which is a 25% increase on a per-share basis from 2018's level. Meanwhile, the company expects to invest $3.1 billion on expansion projects, an increase from the $2.5 billion it planned to spend in 2018. That higher rate will enable the company to fund its share of Elba Island and GCX, as well as other projects like the Permian Highway Pipeline -- a $2 billion gas pipeline that it expects to finish by the end of 2020.
Given the spending and dividend increases, Kinder Morgan expects to outspend cash flow by about $400 million in 2019. However, the company should receive about $260 million from Apache, assuming it exercises its GCX option. The company can easily cover any additional shortfall with some incremental debt, as its balance sheet has improved a great deal over the past year following the sale of Trans Mountain. The debt reduction from those proceeds, when combined with Kinder Morgan's earnings growth, has the company on pace to end next year with a debt-to-adjusted EBITDA ratio of 4.5, which would be a slight improvement from the leverage ratio of 4.6 it expects to have at the end of 2018. That's right at its target level and is conservative for a pipeline company, which has it well positioned to receive a credit rating upgrade in the future.
The numbers make Kinder Morgan look like an even better buy
Kinder Morgan's financial expectations for 2019 make its stock look even more attractive. With shares of the pipeline giant currently fetching around $17.25 apiece, they sell for about 8.4 times 2018's cash flow and yield 4.6% on this year's dividend rate. However, using 2019's financial expectations, the company trades at a mere 7.8 times cash flow and has a forward yield of 5.8%. Those numbers make its stock look extremely attractive for both value and income investors.