Kinder Morgan (KMI 0.88%) gave investors a glimpse into what they should expect in the coming year by unveiling its preliminary financial expectations for 2023. One of the highlights of that report was the news that it plans to increase its dividend for the sixth straight year. That would push the company's 6.3%-yielding payout even higher, further boosting its appeal to income-seeking investors.
Here's a rundown of what the natural gas pipeline giant sees ahead in 2023.
NYSE: KMI
Key Data Points
Drilling down into Kinder Morgan's 2023 gameplan
Management expects Kinder Morgan to generate $7.7 billion in adjusted EBITDA next year. That would be about 3% higher than its 2022 forecast of $7.5 billion. Growth drivers include rising volumes at its refined product and gathering and processing businesses, higher rates as it recontracts its Jones Act tankers, and expansion projects coming into service.
However, the company sees its distributable cash flow declining by about 2% to $4.8 billion, or $2.13 per share. That's entirely due to the impact of higher interest rates on the company's floating-rate debt. Without that impact, its distributable cash flow would have been forecast to rise by 5%.
Despite the declining cash flow, Kinder Morgan will generate enough money to increase its capital spending and boost its dividend with room to spare. The company plans to invest $2.1 billion in expansion projects in 2023. Roughly 80% of its investments will be in lower-carbon projects, including natural gas pipeline expansions, renewable natural gas production facilities, and renewable diesel projects.
Meanwhile, management says it plans to increase its dividend payout by 3% to $1.13 per share annually in 2023. Even with that increase, it will have a conservative dividend payout ratio of 53%. This payment rate implies the company will produce more than $400 million of excess free cash in 2022 after covering its investment spending. As a result, the company expects to end 2023 with a debt-to-EBITDA ratio of around 4.0, well below its long-term leverage target of 4.5. That will give it substantial capacity to opportunistically repurchase shares or make additional accretive investments.
Interest rates go from a tailwind to a headwind in 2023
This coming year will be a tale of two story lines. On the one hand, "We expect 2023 to be another very good year for Kinder Morgan," said CEO Steve Kean in the guidance press release. The CEO sees several drivers, including "strong market fundamentals, continued robust growth in demand for existing and expanded natural gas transportation, storage, and gathering and processing; and continued demand for refined products midstream services and investments in our Energy Transition Ventures business."
However, Kean noted, "those results will be offset by the higher interest rate environment we expect in 2023." That's due to the company's corporate strategy of maintaining a portion of its debt (roughly 25%) at a floating rate. This strategy paid big dividends over the past decade when interest rates were low. To be specific, President Kimberly Dang noted in the press release that it has saved Kinder Morgan "approximately $1.2 billion over the last 10 years." That far exceeds the expected impact of higher interest rates on its cash flow next year.
Meanwhile, the company also has $3.2 billion of debt maturities to address over the next year. It has the flexibility to manage them thanks to its cash on hand, its expected excess cash flow, and an undrawn $4 billion credit facility. That gives it time to wait for market conditions to improve before it refinances with new long-term debt.
A rock-solid passive income stream
This upcoming year will be a mixed bag for Kinder Morgan as earnings will head higher, but cash flow will decline as interest rates shift from a tailwind to a headwind. However, the midstream giant still expects to generate plenty of cash to invest in expanding its business while growing its high-yielding dividend. Meanwhile, that big-time payout will remain on a firm footing since Kinder Morgan has conservative financial metrics. Because of that, it remains an excellent option for those seeking a low-risk passive income stream.
