Historically, Kinder Morgan (KMI 2.20%) has proven itself a long-term income growth and out performance champ, with 12.45% annual dividend growth versus S&P dividend growth of 5.56%,fueling 19.63% annual total returns. This track record of out performance is one of the reasons I've called Kinder Morgan one of America's premier dividend growth stocks, and one of the best retirement stocks you can buy today.
KMP Total Return Price data by YCharts
This article will explain the three reasons I think Kinder Morgan is likely to continue outperforming the market over the coming decades.
Energy Megatrends support the largest backlog in the industry
As America's largest midstream (pipeline, processing, and storage) operators, Kinder Morgan is ideally suited to take part in one of the largest energy booms in American history.
Source: Enterprise Products Partners investor presentation
As this slide from competitor Enterprise Products Partners (EPD 2.44%) illustrates, America's coming energy boom, which is expected to generate $890 billion in investment over just the next 11 years, will have many facets. Kinder's total backlog of $35 billion current and potential projects is the largest in industry, and is competitive with midstream peers such as Magellan Midstream Partners (MMP +0.00%), and Energy Transfer Partners (ETP +0.00%) in terms of backlog / $billion of enterprise value as seen in the below table.
| Company/MLP | Enterprise Value ($Billion) | Total Project Backlog ($Billion) | Backlog/$1 Billion in Enterprise Value | 5 Year Capex/D&A |
| Kinder Morgan Inc | 175.25 | 35.0 | 0.20 | 1.69 |
| Enterprise Products Partners | 92.74 | 6.3 | 0.07 | 2.7 |
| Energy Transfer Partners | 41.65 | 12 | 0.29 | 3.24 |
| Magellan Midstream Partners | 22.62 | 4 | 0.18 | 2.27 |
Sources: Yahoo Finance, S&P Capital IQ, Morningstar.com
In addition the five-year capital expenditures versus depreciation and amortization ratio, a key metric to determine whether management is investing enough into the growth of a company or MLP, is likely to also greatly improve given that management is rapidly increasing its capital expenditures (growth spending) in 2014 -- up 160% from last year.
Here are a few examples of how Kinder Morgan is planning to capitalize on America's energy renaissance and likely grow long-term wealth and income.
Key projects fueling Kinder Morgan
Kinder Morgan is working on two LNG export projects, the Gulf LNG terminal in Pascagoula, Mississippi, and the Elba Liquefaction Project near Savannah, Georgia. The Gulf LNG terminal, which is 50% owned by Kinder Morgan, will be capable of exporting 10 million tons annually and an environmental review by the Federal Regulatory Regulatory Commission (FERC) is under way. Management expects preliminary engineering and design studies to be complete by early 2015 with construction to begin in June of 2016 and exports to commence in 2019.
Kinder's second effort into profiting from one of the most important long-term energy megatrends, the Elba Liquefaction Project, is further along with FERC approval already obtained. Royal Dutch Shell (NYSE: RDS-A) has signed long-term contracts to begin exporting 2.5 million annual tons of LNG from this terminal beginning in 2017.
What makes the Elba project so beneficial to Kinder is that it's 51% owned by Kinder Morgan and 49% by Royal Dutch Shell. The joint venture nature of the terminal means that Shell, who's contracted for 100% of project's capacity, is likely to remain a reliable long-term partner and customer even once the contracts expire.
Crude oil exports
Another area Kinder is expanding into is the potentially lucrative crude oil export business. On June 25 the Commerce Department granted Enterprise Products Partners and Pioneer Natural Resources licences to export minimally processed condensates, a form of crude oil. This is a potentially huge deal since the U.S. has had a 40-year ban on oil exports and 27% of the Eagle Shale formation is condensates. Some analysts believe that if other companies are granted such licences condensate exports could hit 700,000 barrels/day in 2015 and rise to 1.7 million barrels/day by 2018.
To take advantage of this Kinder Morgan is partnering with Magellan Midstream on a joint venture called the Double Eagle pipeline, which will transport 100,000 barrels/day of condensates from the Eagle Ford to Magellan's Corpus Christi condensate splitter when it goes online in mid 2016.
Source: Magellan Midstream Partners investor presentation
This facility will minimally refine the oil and make it eligible for export. The $250 million project is estimated to pay for itself in just six years, indicating a 16.7% rate of return.
What this means for you
Kinder's massive growth potential is likely to be made more profitable thanks to its declining costs of capital, courtesy of its recently completed merger. Specifically the rising of Kinder's credit rating to investment grade, elimination of incentive distribution rights, and $20 billion in depreciation tax savings over the next 14 years is expected to result in superb dividend growth.
Specifically management is guiding for a 16% dividend raise in 2015 and 10% growth after that through 2020. Given Kinder's yield of 4.3%, 130% higher than the market average, such growth is likely to result in not only superb income growth over time, but also maximize the chances of continued market crushing total returns.
What's more, Kinder's management is expecting the merger synergies and tax savings to result in excess cash available for dividends of over $2 billion through 2020, representing a dividend coverage ratio of 1.1 indicating a secure payout.
Bottom line: dividend growth machine firing on all cylinders
Kinder Morgan's past market dominance has been a result of long-term payout growth fueled by a wise and disciplined growth strategy. Given the scale of America's energy revolution over the next 30 years, Kinder's total backlog of diverse projects, declining cost of capital, and generous dividend growth guidance, I think it's likely that long-term income investors will once more beat the market over the coming decades.
While Kinder Morgan is no longer an MLP, this asset class can offer excellent long-term income growth and capital gains possibilities. To learn more about how you can earn massive income from these energy megatrends while simultaneously making huge capital gains, read this free report from the Motley Fool.
