Mention high-yield dividend stocks, and one tends to think of stodgy companies that distribute the vast majority of their profits to shareholders via dividends -- sometimes to the detriment of the company's ability to grow.
And while pipeline and infrastructure giant Kinder Morgan (KMI -0.32%) indeed fell into that stodgy camp a few years ago, a surge in global liquefied natural gas (LNG) demand has ignited a fire in the company's growth prospects.
The company has also focused more recently on maintaining a solid balance sheet and supporting a stable and growing dividend. Here's why Kinder Morgan stock is a no-brainer energy stock to buy for 2023.
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Well-positioned to capture growth
Kinder Morgan has substantial infrastructure in close proximity to Gulf Coast LNG export terminals in Texas and Louisiana, as well as a concentration of existing natural gas storage, processing, and LNG terminals there.
The Permian Basin in West Texas and Eastern New Mexico has grown to become the largest onshore production hub in North America. In October 2022, the U.S. Energy Information Administration reported that the U.S. produced 12.38 million barrels of crude oil per day, including 1.73 million from New Mexico and 5.2 million from Texas. The numbers vary, but the Permian Basin makes up approximately 40% of U.S. oil production and 15% of U.S. natural gas production.
Kinder Morgan has made major investments in pipelines to boost takeaway capacity from the Permian Basin to LNG export terminals. Since the U.S. is energy-independent, much of Kinder Morgan's growth will likely come from projects related to the export of natural gas rather than increased domestic consumption.
Managing risks
One risk is a potential decline in oil and natural gas consumption -- both domestically and abroad -- as more environmentally friendly alternatives become cheaper and more prevalent. The good news is that around two-thirds of Kinder Morgan's business is tied to natural gas, which is less carbon-intensive than coal or oil. This dynamic gives natural gas and LNG more runway as a bridge fuel that can serve an integral role as a reliable fuel source even as emissions reductions take center stage.
Let's suppose that global LNG demand continues to grow. Kinder Morgan's pipelines have contracted an estimated 50% of feed gas that goes to LNG terminals in the U.S. While it isn't immune to competition, the company believes that its advantage in existing pipelines, storage, and terminals will help it retain its market share. Tom Martin, President of CO2 and Energy Transition Ventures at Kinder Morgan, had the following to say on the fourth-quarter earnings call:
I think we're still in a great position to participate in the ... LNG export story. You know, we've talked about 50% as being our market share. That's where we are today. We definitely believe our volumes are going to continue to grow.
In short, if you believe in the growth of U.S. LNG exports, then Kinder Morgan is one of the best-positioned energy infrastructure companies. And unlike the LNG export terminal operators or project developers, 88% of Kinder Morgan's cash flows are through take-or-pay and fee-based contracts, including 42% of total cash flows specifically through interstate natural gas and LNG. This leaves Kinder Morgan less vulnerable to swings in oil and gas prices than an upstream exploration and production company.
Growing revenue and profits
Kinder Morgan finished 2022 with record revenue and net income.
KMI Revenue (Annual) data by YCharts.
Unfortunately, the company is guiding for no net income growth in 2023 and expects to earn $2.5 billion in profit, or around the same as it did in 2022.
And admittedly, the company's performance hasn't been brilliant over the years. Kinder Morgan went public during a time when the oil and gas industry was over-investing leading up to the crash of 2014 and 2015. It was the perfect storm for Kinder Morgan, which was particularly vulnerable as a newly public company that was over-leveraged and in hyper-growth mode.
The stock has generated a paltry 2.3% return since going public in February 2011 compared to a 282.4% total return for the S&P 500. Without factoring in dividends, Kinder Morgan stock is down over 40% since its initial public offering. And its quarterly dividend is down nearly half from its peak of $0.51 per share.
A more reliable dividend stock today
However, investing is less about where a company has been and more about where it is going. Kinder Morgan is far different today than it was 12 years ago -- starting with the balance sheet. Kinder Morgan has sheared 31% off its total net long-term debt in the last eight years. The company said it finished 2022 with the lowest net debt level since its 2014 consolidation transaction. It also generated $842 million in free cash flow in excess of its dividend payments for the year.
Over the last seven years, the company has stayed disciplined with consistently low spending, a growing dividend, and an improving balance sheet. No matter the project, Kinder Morgan ties its investments to long-term contracts that add stability to cash flows and make it easier to predict financial performance. And it plans to raise its dividend by 2% to $1.13 per share in 2023, giving it a forward yield of 6.1%.
The energy sector often gets the reputation of being inconsistent and volatile. But the reality is much more nuanced than that view. The midstream portion of the integrated oil and gas value chain is better-suited for reliable dividend stocks. And Kinder Morgan is best in breed. In sum, it has been a reliable income stock post-crash and has what it takes to sustain that reliability.
For investors looking for a high-yield dividend stock they can count on no matter the market cycle, Kinder Morgan deserves a spot at the top of the list.
