Truist Securities recently downgraded shares of natural gas pipeline giant Kinder Morgan (KMI -0.64%). Analyst Neal Dingmann cut his rating on the stock from buy to hold while also trimming the price target from $22 to $20 per share.
Despite that downgrade, the analyst still sees about an 11% upside in the pipeline stock from its recent price of just under $18 per share. The stock also offers an attractive 6.3% dividend yield.
A dirt-cheap pipeline stock
While Truist's Dingmann lost some bullish on Kinder Morgan's upside potential, it's easy to see why he believes shares could rise more than 11% from their current level. The stock has a dirt-cheap valuation.
Kinder Morgan projects it will generate $2.26 per share of distributable cash flow (DCF) this year, a jump of 8% year over year. Its DCF forecast rose thanks to its recent acquisition of STX Midstream. At its current price, Kinder Morgan sells for less than 8 times DCF, a proxy for free cash flow. Put another way, it has a free cash flow yield of more than 12%. That's significantly higher than the broader market indexes (the S&P 500 trades at about a 4% free cash flow yield while the Nasdaq-100's is around 3%), implying it's extremely cheap.
Kinder Morgan's dirt-cheap valuation also goes some way to explaining why it can offer such a high dividend yield. The company can easily support that big-time dividend (its payout level will be around 50% of its DCF this year). That's giving it the flexibility to increase its dividend again this year (it expects to raise the dividend by around 2%, its seventh straight year of growth).
While Kinder Morgan might not offer the high price appreciation opportunity of some other stocks, it offers compelling total return potential, driven by its cheap valuation and high dividend yield.
