Kinder Morgan (KMI -0.32%) is one of the largest natural gas, oil, and carbon dioxide infrastructure companies in North America. It isn't the flashiest business, but it plays an integral role in energy transportation and storage.
The bigger opportunity involves the company's investments in liquefied natural gas (LNG). Demand for LNG is growing as energy-dependent countries increasingly turn to the energy source as a cleaner and equally reliable alternative to coal and oil.
Kinder Morgan has an industry-leading existing core business and plenty of opportunities for multidecade growth. Pair that balance with a 6.1% dividend yield, and you have a passive-income machine that you can count on for years. Here's why it is a high-yield dividend stock worth considering now.
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A rock-solid balance sheet
To support a stable and growing dividend, a company has to have a well-run business and a healthy balance sheet. Kinder Morgan's improved balance sheet is a key reason the stock is perfect for generating passive income.
After the oil and gas crash of 2014 and 2015, Kinder Morgan slashed its dividend by 75% and restructured its business to be leaner and less capital-intensive. The strategy worked, and its total net long-term debt position is now at a 10-year low.
KMI net total long-term debt (quarterly); data by YCharts.
During its fourth-quarter 2022 earnings call, the company said that it finished the year with a ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) of 4.1 times. For the full year, it had originally budgeted a debt-to-EBITDA of 4.3 times. And the company continues to peg 4.5 as its long-term target.
A growing dividend supported by free cash flow
Kinder Morgan paid $2.5 billion in dividends in 2022, which was nearly all of the $2.55 billion in net income it generated. So its payout ratio is nearly 100%. However, a more useful metric for looking at the company's ability to pay down debt and support a growing dividend is free cash flow (FCF).
Even after ramping up capital expenditures, Kinder Morgan still finished 2022 with $3.35 billion in FCF, or $842 million in FCF after dividends.
For 2023, Kinder Morgan announced a modest 2% dividend raise and is guiding for $1.13 per share in annual payments, or $0.2825 per quarter, giving it a forward dividend yield of 6.1%. And although it is only guiding for $1.12 in earnings per share for 2023, it should be able to generate FCF that well exceeds dividend payments.
A conservative business strategy that's perfect for gradual growth
Kinder Morgan has returned to growth. But it also continues to be prudent with its spending and investments. For example, it paid around $500 million for two renewable natural gas (RNG) acquisitions last year. But it also received $560 million from the sale of its part interest in the Elba Liquefaction Company.
So while some energy infrastructure companies might go full throttle during this growth cycle, Kinder Morgan continues to hold back by selectively picking and choosing projects with high returns.
The company finished the quarter with a $3.3 billion backlog of projects at a 3.4 EBITDA multiple. Put another way, Kinder Morgan believes it can generate $971 million in EBITDA per year from this backlog, and break even from an EBITDA perspective in 3.4 years. That's an incredibly profitable backlog with quick returns. CEO Steve Kean summarized it well on the fourth-quarter earnings call:
What you're seeing when we have a backlog that's $3.3 billion, and we're executing it at 3.4x EBITDA multiples is that our network is well positioned and we're able to make relatively modest capital-efficient investments in our grid to expand, to serve the supply-and-demand growth that we're seeing across the network. And so, that's -- you know, in the past, we had big, long-haul projects that might have been done at a slightly higher multiple, still attractive returns. But I think this shows you the fact that we have dozens of projects that we're doing and at relatively modest capital expenditures each, but with really nice returns that, we are finding that our network is extremely well positioned for the growth along it.
In sum, Kinder Morgan is far stricter with its investments than in years past. And that leads to selective investments and capital discipline, which are hallmarks of a good dividend stock.
The ideal passive-income role player
During a period of surging oil and gas prices, Kinder Morgan isn't the kind of company that is going to outperform the energy sector like a quality exploration and production company can. But its reliable business and long-term contracts mean that it is also probably going to outperform the energy sector during a downturn.
A good way of integrating Kinder Morgan into a diversified portfolio is by using the stock as a role player that can generate a high amount of passive income. Its dividend yield is well above the risk-free rate even though interest rates are rising. And that's not something that can be said about most S&P 500 stocks.
For investors who believe in the need for added natural gas infrastructure, particularly for RNG and LNG, Kinder Morgan is a high-yield dividend stock worth considering now.
