Kinder Morgan (KMI -0.64%) has one of the highest-yielding dividends in the S&P 500. Its 6.6%-yielding payout is in the top 5% of the index, where the average yield is 1.6%.
While a high dividend yield can sometimes indicate a company that's at risk of needing to cut its payouts, that's not the case for Kinder Morgan. That was evident in the natural gas pipeline giant's third-quarter earnings.
A model of stability
Kinder Morgan generated a little less than $1.1 billion of distributable cash flow (DCF) during the third quarter. That was down slightly from the prior-year period, when it produced just over $1.1 billion in DCF. It displayed that income stability during a relatively turbulent period for the energy markets, with oil and natural gas prices slumping year over year. While declining energy prices impacted the company's carbon dioxide operations, the overall stability of its earnings helped mute that impact.
Data source: Kinder Morgan. Chart by author.
Three of the company's four segments delivered improved earnings in Q3:
- Natural gas pipelines: Earnings rose 3% year over year, mainly fueled by higher volumes. Transport volumes increased by 5% (partly driven by higher volumes delivered to power plants), while gathered volumes jumped 11% due to higher production.
- Product pipelines: Earnings surged 22%. The main driver was higher prices and rate escalations. The company's network also benefited from higher refinery, crude oil, and jet fuel volumes.
- Terminals: Earnings grew by 8%, primarily driven by higher tanker rates. The company also benefited from higher terminal utilization and expansion projects.
- Carbon dioxide: Earnings slipped 10% due to lower prices on natural gas liquids and carbon dioxide (down 18% and 13%, respectively), reduced volumes, and higher power costs. The company partially offset this weakness with contributions from its renewable natural gas business.
Kinder Morgan's solid third-quarter showing pushed its total cash flow from operations to nearly $4.2 billion for the year. That covered the company's capital expenses (less than $1.7 billion) and its dividend outlay (almost $1.9 billion) with $582 million to spare.
Kinder Morgan used that excess free cash flow to repurchase shares and strengthen its already-solid balance sheet. The company has repurchased $472 million worth of shares this year, including $73 million in the third quarter. Meanwhile, it ended the period with a leverage ratio of 4.1, which is below its target of 4.5.
The steadiness should continue
Kinder Morgan initially forecast that it would produce $4.8 billion of distributable cash flow, or $2.13 per share, this year. It's on track to finish 2023 slightly below that target due to lower commodity prices, delays in completing renewable natural gas projects, and higher costs to maintain its pipelines. However, the company will generate enough cash to cover its dividend (which it boosted by 2% this year to $1.12 per share) and capital expenses with room to spare. That should enable it to reduce its leverage ratio to close to 4.0 by year's end, even with the unbudgeted share repurchases.
Meanwhile, the company has continued to make progress on its expansion plans. It ended the third quarter with $3.8 billion of capital projects in its backlog, up $100 million from the second quarter. Kinder Morgan continues to secure high-return expansion projects that should grow its cash flow over the long term.
Management sees meaningful opportunities for growth. CEO Kim Dang noted in the Q3 earnings release that natural gas demand is expected to grow by more than 20% through 2028, fueled by LNG exports, exports to Mexico, and power generation demand. That should drive more volume through its existing networks while providing further expansion opportunities.
In addition, the company continues to pursue other lower-carbon fuel investments. It's expanding its ability to handle renewable diesel and sustainable aviation fuels, building renewable natural gas production facilities, and investing in carbon capture and storage.
The payout is as solid as ever
Kinder Morgan's third-quarter results show the durability of its business. The company still produced steady cash flow despite lower energy prices. That gave it more than enough money to cover its dividend and capital spending plan. With more stability and growth ahead, Kinder Morgan should be able to continue paying (and increasing) its dividend. That makes it a rock-solid option for those seeking a secure passive income stream.
