Pipeline giant Kinder Morgan (NYSE:KMI) used to be a dividend investor's darling before slashing its payout by 75% in late 2015 to just $0.50 per share per year. The cut came as Kinder Morgan was struggling during the oil downturn and faced a potential credit rating downgrade that would have tipped the company into junk bond territory. 

After a few dividend increases, Kinder Morgan now pays $1.00 per share and expects to raise that to $1.25 in 2020. It's clearly trying to get back into the good graces of dividend investors, but is that enough to make this energy stock a buy?

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A cash flow machine?

Kinder Morgan claims to be a "cash flow generation machine," and it has a point.

EBITDA is one of the preferred ways of understanding a business independent of its capital structure, such as how much debt it has. Kinder Morgan had EBITDA of $5.598 billion and distributable cash flow (DCF) of $3.639 billion for the nine months ended Sept. 30, 2019.

For the nine months ended Sept. 30, 2019, DCF per common share was $1.60, while dividends per common share were less than half that, at $0.75. That leaves Kinder Morgan with more money to invest in major projects, which is exactly what it has been doing.

In service at last

Kinder Morgan has been the long-anticipated saving grace for producers of natural gas out of the red-hot Permian Basin, and that salvation is finally here.

For most of 2019, Permian natural gas production exceeded takeaway capacity. This led producers to flare (or burn off) the associated natural gas that is a byproduct of oil production. Flaring methane emits harmful CO2, raising serious environmental concerns that threaten the longevity of shale plays that are already on the hot seat for their heavy use of fracking.

The loss of money from wasting gas and the harm to the environment provided good reasons for Kinder Morgan to enter into part ownership of two major pipeline projects, the Gulf Coast Express (GCX) and the Permian Highway Pipeline (PHP). Each can transport around 2 billion cubic feet per day of natural gas.  

The first of the pipelines, the GCX, began operations in September and has a minimum contract term of 10 years. That pipeline is expected to absorb a good chunk of still increasing demand until early 2021, when the PHP is forecast to enter service.

The macro outlook

Massive pipeline projects like the GCX and PHP bode well for Kinder Morgan to continue generating 91% of cash flow from regulated or fee-based sources. That being said, the construction of planned pipelines and the ability to secure contracts depend on sustained growth of production out of the U.S. shale plays, as well as the increasing demand for natural gas. Both of those trends point in Kinder Morgan's favor.

According to the U.S. Energy Information Administration's (EIA's) November Short-Term Energy Outlook, "annual U.S. dry natural gas production will average 92.1 billion cubic feet per day (Bcf/d) in 2019, up 10% from 2018 ... natural gas production in 2020 will average 94.9 Bcf/d." U.S. natural gas production reached a new daily production record on Aug. 19 of 92.8 Bcf/d.  

Kinder Morgan says it expects about 33% growth in U.S. oil and natural gas production by 2025, and that the U.S. will produce about 25% of the world's natural gas by 2025. 

Both the EIA's and Kinder Morgan's estimates paint a rosy picture for the growth in U.S. natural gas demand. If the shale revolution continues unlocking natural gas sources that were once financially uneconomical,then Kinder Morgan stock could look even more attractive.

Growth and value

The stock currently yields 5% while paying a yearly dividend of $1.00, but would yield 6.35% in 2020 with the planned dividend increase and a stock price around the current level.

Kinder Morgan is worth a look for investors interested in a high-yield dividend stock with prospects tied to the growth in U.S. natural gas production and transportation.