Kinder Morgan (KMI 0.88%) is one of the largest energy transportation and storage companies in North America. The business model is straightforward -- build assets that can return positive cash flow over their useful life and then use that cash flow to support dividend payments to shareholders.
Kinder Morgan has spent the last eight years reviving its tainted image after it cut its dividend in response to the oil and gas crash of 2015. It's been a long road of repairing the balance sheet and regaining investor trust. Throw in doubts about the long-term viability of oil and natural gas assets in a carbon-conscious world, and you have a business that faces a slew of short- and long-term challenges.
But Kinder Morgan seems to have found a sweet spot that shareholders can feel confident about. After all, the stock features a 6.2% dividend yield, which is four times higher than the average stock in the S&P 500. Here's a look at what the company is doing right and why its strategy makes it a reliable dividend stock.
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A roadmap for sustained growth
Kinder Morgan has a lot of legacy infrastructure assets. Think of natural gas, crude oil, and CO2 pipelines, as well as terminals, storage assets, and joint ventures in other projects. But these assets will only last so long. So Kinder Morgan needs new assets that could generate predictable cash flows from take-or-pay and fee-based contracts, which help limit the impact of volatile oil and gas prices. But it's hard to justify building new oil and gas assets with decades of useful life if U.S. natural gas and oil demand is falling.
Kinder Morgan has two main solutions to this problem. The biggest and most important tailwind for Kinder Morgan's growth is liquefied natural gas (LNG), which is the saving grace of many gas pipeline operators. The focus is no longer on U.S. consumption but rather on U.S. production.
Russia's invasion of Ukraine was a painful reminder of the importance of energy security. Importing nations are in dire need of reliable energy that can complement renewable energy investments. And LNG has shown to be an effective, if not expensive, way to fill that void. The process involves transporting natural gas via pipeline from production regions to export terminals. These terminals supercool gas into a liquid where it can then be safely transported overseas via tanker. Import terminals regasify the LNG, and it can then be handled like normal natural gas. It's a complicated system, but it opens the door for a global natural gas trade.
The industry is vital to Kinder Morgan. Higher natural gas production in the U.S. means more infrastructure assets to supply LNG terminals. That way, Kinder Morgan can justify investing billions of dollars in a new pipeline. Without LNG, the case would depend largely on domestic consumption or onshore transportation to Mexico via pipelines.
The second solution is renewable natural gas (RNG). Unlike fossil-based natural gas, which is produced from underground reserves, RNG is produced from wastewater, cow manure, municipal solid waste from landfills, and food waste. The process produces natural gas from the decomposition of organic materials and prevents methane from otherwise being released into the atmosphere, which is why the fuel is termed "renewable."
Similar to fossil natural gas, RNG requires infrastructure like pipelines and storage.
In sum, Kinder Morgan now has three main avenues for growth. The first is through traditional outlets, such as making acquisitions, servicing existing assets, or incremental additional projects to support oil and gas. The second is for the LNG industry. And the third is for the RNG industry, as well as biofuels and other low-carbon sources.
NYSE: KMI
Key Data Points
Taking action
Over the last few years, Kinder Morgan has completed several projects and made some key acquisitions that fall into these three growth buckets. For example, its acquisition of Kinetrex Energy supports its RNG efforts, while its acquisition of Stagecoach Gas Services was a value play on legacy infrastructure.
Many of its recent pipeline projects center around transporting gas across Texas to support the growing LNG industry.
On its second-quarter 2023 earnings call, Kinder Morgan discussed project completions and its backlog. The company added new projects to the backlog, suggesting that there's no shortage of ideas as there appeared to be in years past -- a good sign that the company has returned to growth.
In sum, the company is generating plenty of cash to fuel dividend growth and has a roadmap for generating future returns that will support dividend raises.
Kinder Morgan is a passive income powerhouse
Kinder Morgan's game plan works in a sustainability-focused world. LNG can replace coal in the energy mix. And natural gas serves as a readily available power source that can complement an increasingly intermittent power grid. Meanwhile, RNG checks all the boxes and could continue to be more cost-competitive with natural gas as the industry develops and tax credits support RNG projects.
Kinder Morgan is a stock worth considering for investors who are looking to supplement income in retirement or are simply more focused on passive income than capital gains.
