Companies with high dividend yields often tend to be past their prime, and lacking in growth prospects. That limited ability to invest in expanding their businesses is why they instead distribute more of their free cash flow to shareholders.
That used to describe Kinder Morgan (KMI +0.28%). The pipeline giant's earnings had leveled out in recent years due to slowing demand growth for natural gas. Because of that, it has only been hiking its high-yielding dividend (3.7% at current share prices) by modest rates of around 2% per year.
However, the natural gas industry is starting to experience a revival, fueled by growing power demand for AI data centers and other catalysts like the re-shoring of manufacturing.
"This is the most exciting time to be in the midstream natural gas market that I've seen in my long decades in this business," stated co-founder and Executive Chair Richard Kinder on Kinder Morgan's fourth-quarter conference call. Here's a look at all the growth the midstream energy company has coming down the pipeline.
NYSE: KMI
Key Data Points
Capitalizing on the gas resurgence
On the fourth-quarter call, Kinder commented about how the recent growth resurgence has impacted Kinder Morgan's business: "These drivers are creating enormous opportunities for expansion of the natural gas pipeline and storage system across America and especially in the Gulf Coast and Southeast regions." He then outlined the company's response to these opportunities:
In the last few months, we have announced the FID [final investment decision] of four new major projects: the expansion of our GCX system out of the Permian Basin; our SS4 Expansion on our Southern Natural Gas system; our Mississippi Crossing line, which will serve SS4 and other increased demand in the Southeast; and our Trident line, which we announced today, which will serve growing demand in the Southeast Texas region, including the new Golden Pass LNG facility. Altogether, these new projects will entail capital expenditures net to us in excess of $5 billion and will have the capacity to transport over 5 Bcf [billion cubic feet] a day of natural gas.
To put that capital outlay into context, Kinder Morgan ended 2023 with $3 billion of capital projects in its backlog. Today, it has $8.1 billion of expansion projects underway, with expected in-service dates through the fourth quarter of 2029.
Kinder noted that long-term contracts with creditworthy customers (primarily on the demand side) support all its new projects. These projects also boast investment returns significantly above its cost of capital. "We believe that our investments as they come online will drive growth in EBITDA and EPS for years to come," he said.
More growth likely
Kinder then turned the call over to CEO Kim Dang, who discussed what the company still sees ahead. She stated:
As we look to the future, we continue to see additional growth opportunities in natural gas between LNG, exports to Mexico, power, and industrial growth. Our internal number for growth in the overall natural gas business is roughly 28 Bcf a day of growth between now and 2030. Our assets are well-positioned to serve this growth. We currently serve approximately 45% of the export LNG demand, 50% of the exports to Mexico, and 45% of the power demand in the combined region of the Desert Southwest, Texas, and the Southeast.
To put that number into context, natural gas demand was 108 Bcf a day in 2023 -- adding 28 Bcf would amount to more than 25% growth by the end of the decade. As a leader in transporting and storing natural gas, Kinder Morgan should capture a significant share of the market's incremental demand growth. "We're looking forward to further growth and capitalizing on additional opportunities in 2025," said Dang.
That growth will come from two sources. The company will likely secure new natural gas infrastructure projects to support its existing network.
"Looking forward," said Kinder Morgan President Tom Martin on the call, "we continue to see significant incremental project opportunities across our natural gas pipeline network to expand our transportation and storage capabilities in support of the growing natural gas market."
In addition, the company has the financial flexibility to pursue acquisitions when the right opportunities arise. Kinder noted that, besides expansion projects, "we are seeing other sizable opportunities to grow our business, as exemplified by our recently announced Outrigger transaction, which will expand our position in the Bakken."
The company is spending $640 million to acquire a natural gas gathering and processing system in North Dakota. That acquisition will supply it with incremental income while reducing the capital spending it would have needed to support the growing production of its customers in the region. It can now reallocate that capital toward its growing pipeline of larger-scale expansions.
Exciting times
Kinder Morgan couldn't be more excited by its long-term growth prospects. Resurgent demand for natural gas has enabled the company to add $5 billion of gas pipeline expansion projects to its backlog over the past few months. Management is optimistic that it will secure even more projects and other growth-related investments in the future. These drivers should give Kinder Morgan the ability to grow at an accelerated rate, which could allow it to ramp up its dividend growth rate. That makes it a compelling long-term investment opportunity for those seeking both growth and income.
