Kinder Morgan (KMI 0.50%) recently announced its financial expectations for 2021. One highlight is the company's plan to increase its dividend for the coming year. That raise will push its payout even higher than the current 7.1% yield, making it an even more enticing option for income investors.
Drilling down into the 2021 game plan
Kinder Morgan currently expects to generate $4.4 billion, or $1.95 per share, of distributable cash flow in 2021. That's about 3% below its 2020 forecast, which is on track to decline 10% from 2019's level. Several factors have impacted its cash flow, including lower recontracting rates on some of its natural gas assets, lower oil volumes and realized prices in its carbon dioxide segment, and higher maintenance capital expenses.
Image source: Getty Images.
The company plans to invest about $800 million of that cash on expansion projects in 2021, well below the roughly $1.7 billion it spent in 2020. Meanwhile, it expects to increase its dividend per share by 3% for 2021, implying that it will pay out roughly $2.4 billion in dividends. That will leave it with approximately $1.2 billion of excess free cash flow. Kinder Morgan expects to utilize $450 million of those funds to repurchase shares while using the rest to pay down debt. That plan will enable the company to maintain a leverage ratio of around 4.6 times debt-to-EBITDA, right around its 4.5 times target level.
Broken promises, again
With its planned 3% increase for 2021, Kinder Morgan's dividend will be up to $1.08 per share. That implies a 7.3% yield at its current trading level. While that payout is well above average, it's still a bit disappointing for investors. Kinder Morgan had long promised that it would pay out $1.25 per share, which it initially expected to achieve by this year. While the company stated in the second quarter that it remained committed to increasing the dividend to that level, market conditions remain too weak for it to have the confidence to boost its payout as much as promised.
Those concerns are driving the company to use the bulk of the $1.2 billion in excess cash it expects to generate to reduce debt. However, it plans to repurchase some shares, which makes sense given its low valuation. With the stock recently trading at less than $15 a share and likely generating $1.95 per share in cash flow next year, Kinder Morgan sells for less than 8 times cash flow.
That low valuation is due in large part to its declining cash flow. Despite investing billions of dollars in expanding in recent years, Kinder Morgan's cash flow has steadily declined due to the impact of volatile oil prices on its operations. Meanwhile, it has even fewer growth prospects ahead because all the turbulence has halted the U.S. oil industry's growth ambitions. While the company could consider an acquisition to jump-start its growth engine, it doesn't have a lot of financial flexibility to make deals due to its low stock value and a leverage level that's already above its target. It thus doesn't seem likely that Kinder Morgan will ever deliver on its promised dividend level.
More income ahead in 2021
This year's oil market downturn threw a wrench into Kinder Morgan's dividend growth plans. However, while the company didn't deliver on its initial target, it did provide investors with a couple of modest raises, which is more than most other energy companies could do over the past year. Meanwhile, its dividend has proven its durability, making it an ideal choice for income-focused investors seeking a higher yield in the current low interest rate environment.
