Kinder Morgan (KMI 0.17%) recently provided its financial guidance for 2024. The natural gas pipeline giant expects its earnings and free cash flow to rise next year. That's giving the company the fuel to raise its already attractive 6.3%-yielding dividend once again.
Here's a look at what Kinder Morgan sees ahead in 2024.
NYSE: KMI
Key Data Points
Solid growth with more in the pipeline
Kinder Morgan revealed its financial expectations for the coming year. The pipeline company expects to generate $8 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). That's 5% higher than what it expects to produce this year. The company also expects its distributable cash flow (DCF) to rise by 5% to $5 billion, or $2.21 per share.
The company sees several factors fueling growth next year. Market fundamentals in the natural gas sector are strong, driving volume growth across its existing assets and creating new expansion opportunities. The company also expects to benefit from higher rates in its refined products business and growing demand for renewable diesel, renewable diesel feedstocks, and renewable natural gas (RNG).
It's important to note that these numbers don't include the incremental income from the company's pending acquisition of STX Midstream from NextEra Energy Partners (NEP +4.80%). Last month, Kinder Morgan agreed to pay roughly $1.8 billion for NextEra Energy Partners' South Texas pipeline assets. That purchase price implied Kinder Morgan is paying 8.6 times EBITDA for STX Midstream (suggesting it will produce around $210 million in EBITDA for the full year). Kinder Morgan expects to close that deal in the first quarter of next year. Because of that, it should provide an additional boost to the company's adjusted EBITDA and DCF in 2024.
The flexibility to be opportunistic
Kinder Morgan expects to use its robust cash flow to pay dividends, invest in high-return capital projects, and enhance its already robust financial flexibility. The company intends to increase its dividend by 1.8% in 2024 to an annualized rate of $1.15 per share. That would be the seventh straight year of dividend growth for the company. This rate would put its dividend payout ratio at 52%.
It also expects to invest around $2.3 billion into expansion projects, about $400 million more than this year. The company is investing $1.4 billion into high-return infrastructure projects that generate predictable cash flow, including gas pipeline expansions and RNG facilities. In addition, it plans to invest about $900 million in projects with more market-sensitive cash flows, like gathering and processing expansions and enhanced oil recovery projects.
Despite the increased dividend and investment spending, Kinder Morgan will have a lot of financial flexibility next year. It expects its leverage ratio to fall to 3.8 times (down from 4 times in 2023 and well below its 4.5 times target). While it expects to use some of its financial flexibility to acquire STX Midstream, it only sees the deal increasing its leverage ratio by 0.1 times after factoring in the incremental earnings.
That low leverage ratio gives Kinder Morgan the flexibility to be opportunistic. It could use its financial capacity to repurchase shares and make additional value-enhancing acquisitions. It has demonstrated its ability to be opportunistic in 2023, capitalizing on the opportunity to buy STX Midstream from the financially strapped NextEra Energy Partners. It also made $470 million of unbudgeted share repurchases, buying back 28 million shares at $16.58 apiece (about 7.5% below the current price).
A strong base with ample upside
Kinder Morgan expects to grow its earnings and cash flow by at least 5% next year. That number doesn't include its pending acquisition of STX Midstream or the potential to opportunistically use its financial flexibility to drive additional earnings-per-share growth. Those factors give the company the confidence and fuel to increase its dividend again. Add that rock-solid and steadily growing income stream to the company's rising earnings, and Kinder Morgan has the fuel to potentially produce a double-digit total return in 2024. That's an excellent return potential from such a low-risk stock.
