Shares of Kinder Morgan (KMI -0.34%) have quietly gained 9% year to date as the energy sector continues to outperform the broader market. The largest natural gas pipeline infrastructure company in the U.S. is expected to report its fourth-quarter and full-year 2021 results in about a week. But it has already released expectations for 2022.
Let's dive into Kinder Morgan's business and its 6.3% dividend yield to see what makes it a top dividend stock for 2022.
Image source: Getty Images.
A predictable business model
Unlike other oil and natural gas stocks that benefited from seven-year high energy prices, Kinder Morgan's long-term take-or-pay and fee-based contracts dampen its ability to capture upside while also insulating it from steep losses during downturns. It's a double-edged sword that worked in Kinder Morgan's favor in 2020 and somewhat against it in 2021. Overall, however, it's this very stability that gives Kinder Morgan the predictable cash flow needed to support its dividend while keeping a healthy balance sheet.
Long-term contracts make Kinder Morgan's business easy to forecast. When the COVID-19 pandemic hit in spring 2020, Kinder Morgan updated its full-year 2020 guidance in April. When the numbers were all said and done, this initial April update ended up being over 99% accurate, which is incredible considering the events that transpired that year and the volatility the oil and gas industry experienced. It's this accuracy that is allowing Kinder Morgan to already predict its full-year 2022 results, a prediction that investors can count on as being relatively accurate given Kinder Morgan's track record.
Image source: Getty Images.
2022 expectations
Kinder Morgan assumes West Texas Intermediate (WTI) crude oil and Henry Hub natural gas prices of $72.50 per barrel and $4.25 per million British Thermal Units (MMBtu), respectively, in 2022. However, it notes its carbon dioxide (CO2) segment is the most sensitive to commodity price risk. CO2 tends to be Kinder Morgan's smallest segment, contributing negative earnings in 2020 and less than 10% of the company's 2019 earnings.
Kinder Morgan benefited heavily from Winter Storm Uri, the Texas natural disaster that led to temporarily astronomical commodity price rises. Even with that windfall, which was major, Kinder Morgan still expects higher adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), earnings per share (EPS), and net income in 2022 versus 2021.
|
Metric |
2022 Guidance |
2021 Guidance |
|---|---|---|
|
Adjusted EBITDA |
$7.2 billion |
$6.9 billion |
|
EPS |
$1.09 |
$0.76 |
|
Net income |
$2.5 billion |
$1.7 billion |
|
Distributable cash flow (DCF) |
$4.7 billion |
$5.4 billion |
|
DCF per share |
$2.07 |
$2.38 |
|
Full-year dividend per share |
$1.11 |
$1.08 |
Data source: Kinder Morgan.
If Kinder Morgan's guidance proves correct, it will have a forward price to earnings (P/E) ratio of just 15.8, a significant discount to the average stock in the S&P 500, which has a P/E ratio of 27.1. What's more, Kinder Morgan expects to generate $2.07 per share in DCF, far outpacing its dividend obligation.
Kinder Morgan is positioned to have raised its quarterly dividend every year for the past five years from $0.125 per share in 2017 to its expected $0.2775 per share this year -- while improving its balance sheet. Unlike many oil and gas companies that have had to rely on debt to maintain dividend payments, Kinder Morgan generates plenty of cash to fund its business and support its dividend. It continues to reduce the debt on its balance sheet and is arguably in its best financial shape since the oil and gas crash of 2014 and 2015.
A solid and reliable high-yield dividend stock
A track record for paying and raising a dividend supported by a strong business is more important than a high yield. But Kinder Morgan has both a reliable dividend and a high yield. The company has repeatedly highlighted the dividend as the primary means by which it intends to create shareholder value, not a rising stock price.
Despite making sizable acquisitions in 2021 and developing major projects over the last few years, Kinder Morgan remains a slow grower whose business is more focused on steady or even stagnant growth and high cash flow. That's music to income investors' ears because it leaves more cash for Kinder Morgan to pay and raise its dividend.
Investors who would be happy with a 6% low-tax return in 2022 should look no further than Kinder Morgan.
