Kinder Morgan (KMI 2.20%) is one of the biggest dividend-paying stocks in the S&P 500. It's one of only a handful of companies in that broader market index with a dividend yield of 6% or higher.
The pipeline company plans to increase its already sizable dividend by another 2% this year, marking its sixth straight year of increases. Here's a look at the company's payout and what its management team had to say about its future on its fourth-quarter conference call.
NYSE: KMI
Key Data Points
Allocating its abundant cash flows
Kinder Morgan generates lots of recurring cash flow from the contracts and regulated rate structures supporting its diversified energy infrastructure operations. For 2022, the company produced $4.97 billion, or $2.19 per share, of distributable cash flow.
Co-founder and current executive chairman Rich Kinder discussed the company's strategy for allocating its cash flow on the call. He stated: "We again produced strong cash flow, well in excess of our budget, and use that cash flow to pay our investors a healthy and growing dividend, fund our expansion capex, maintain a strong balance sheet, and buy back shares on an opportunistic basis. In short, we are continuing to follow the financial philosophy that we have stressed for years."
The company paid $2.46 billion, or $1.11 per share, in dividends, up 3% on a per-share basis from the prior year. It also funded $1.1 billion of expansion projects and made about $500 million in renewable natural gas acquisitions. Finally, it repurchased $368 million of its stock and reduced its net debt by $287 million.
The company expects more of the same this year. It anticipates producing about $4.8 billion, or $2.13 per share, of distributable cash flow. It anticipates increasing the dividend by another 2% to $1.13 per share and making opportunistic share repurchases (it increased its authorization from $2 billion to $3 billion). It's also funding an expanded set of expansion projects at $2.2 billion, which Kinder noted: "should drive nice growth in 2024 and beyond."
The dividend outlook
The meager dividend increase combined with a big boost to the repurchase program and capex budget led an analyst on the call to ask whether the company was changing its capital allocation strategy.
CEO Steve Kean answered: "It doesn't imply any shift or change in approach at all." He noted that Kinder Morgan looks to fund capital projects with attractive returns that add value to the company. It also seeks to return money to "shareholders in the form of a modestly growing and well-covered dividend and share repurchases." He noted that the increased capacity on the repurchase authorization wasn't due to a change in strategy but to give it the flexibility to be opportunistic.
Meanwhile, company president Kim Dang, who will take over as CEO when Kean transitions out of that role later this year, commented on the dividend. She stated: "We believe it's important to increase the dividend when the company is growing. But we are one of the top 10 dividend yields in the S&P 500." Because the company already has an attractive yield, it's just doing a small increase to remain a good dividend-paying stock.
This view suggests the company will probably continue to deliver modest dividend growth in the future. It will likely use the money it could have paid out in dividends to opportunistically repurchase its shares, which remain attractive compared to the broader market. Kinder Morgan's 8.5% free cash flow yield is in the 81st percentile of stocks in the S&P 500. That relatively low valuation is why it offers such a high dividend yield.
Expect the modest growth to continue
Kinder Morgan has the cash flow to support a higher dividend. However, it already has a high dividend yield because of its relatively low valuation. Investors should expect it to continue delivering modest dividend annual growth in the low single digits while returning excess cash through its opportunistic repurchase program. While that's not the most exciting outlook, it does make Kinder Morgan a rock-solid option for those seeking a sizable passive income stream.
