Kinder Morgan Inc (NYSE:KMI) hasn't made it through the oil crash unscathed. The company has had to remove $1.685 billion in oil projects from its backlog in the last two quarters, yet despite this setback, there are three major reasons for long-term income investors to be bullish about Kinder's prospects at today's prices: Kinder's enormous total backlog, its strong long-term dividend growth runway, and fertile future prospects for growth via acquisitions.
Kinder's backlog: Much bigger than you think
Kinder's backlog officially stands at $18.3 billion, which ensures plenty of growth in the years ahead. Yet many investors don't realize the company really has two backlogs: the current $18.3 billion backlog -- which represents projects that have secured sufficient contracts to be completed profitably -- and a "shadow backlog" of around $19.2 billion of promising projects that management eventually plans to complete.
Kinder's removal of its CO2 oil projects over the last six months didn't mean the projects got cancelled; they were merely shifted into its shadow backlog to await the eventual recovery in crude prices.
This means that, all told, Kinder has around $37.5 billion of total backlog it can work on to achieve its ambitious dividend growth plans of 15% in 2015 and 10% through 2020. At Kinder's present capital expenditure investment rate of $3.7 billion per year, it would take 10 years to complete this backlog, but in reality, Kinder should be able to complete it much faster. That's because since 2010, the company's annual cap ex spending has soared 270%, growing at an impressive compound annual growth rate of 30%.
Dividend can keep growing for a very long time
Kinder's claim to fame among dividend investors is its industry-leading ability to deliver on forecast payout growth. In fact, since 2000, Kinder and its family of MLPs -- which it recently merged with -- have met or exceeded payout growth guidance 95% of the time.
This excellent track record of delivering on dividend growth is just one reason income investors should buy Kinder today, with its generous 4.6% forward yield being another.
However, what really excites me about Kinder's dividend growth prospects is that the company has so many ways to keep it growing for decades to come.
For example, I've already pointed to Kinder's gargantuan total backlog, but even that is merely a drop in the bucket of the $30 billion per year in midstream infrastructure spending America's shale boom will require over the next 20 years.
Another dividend growth avenue the company can pursue is accretive acquisitions of competing MLPs and midstream -- oil and gas processing, storage, and transportation -- assets.
Acquisitions mean decades of major growth ahead
There are currently over 120 MLPs with a total market cap of around $875 billion, meaning Kinder Morgan has -- in the words of founder and Chairman Richard Kinder -- "a target-rich environment" for acquisitions.
Mr. Kinder recently told analysts the company expects to continue its recent pace of small to mid-size buyouts -- it's purchased $3.25 billion worth of MLPs and assets in the past few months -- to help it achieve its dividend growth plans.
One of the biggest reasons for acquiring rival MLP assets isn't just to grow cash flows, but to achieve large tax benefits as well. Current tax law allows an acquiring company to reset the value of an acquired MLP's assets equal to what it just paid. This can mean -- thanks to accelerated depreciation -- potentially tens of billions of dollars in tax savings over the long term.
For example, its recent merger with its MLPs is eventually expected to net Kinder $55 billion -- about $4 billion per year -- in decreased taxes over 14 years.
That $4 billion per year in tax savings is more than enough to fund the company's current pace of acquisitions, and future mergers can be expected to similarly help Kinder to grow its diverse asset base while simultaneously increasing its distributable cash flow -- both from increasing fixed-fee long-term contracted cash flows and accelerated depreciation. That, in turn, could mean many more years of sustainable, consistent dividend growth.
Bottom line: Ignore Kinder's short-term struggles and focus on its long-term potential
Energy prices are inherently volatile and unpredictable. Yet Kinder Morgan's strength is that its excellent management team has the ability to steer it through the turbulent seas of periodic industry downturns to brighter and more profitable times in the future, while consistently growing its dividend.
With the fracking revolution promising decades of strong growth in U.S. oil and gas production, Kinder Morgan is one of the best high-yield dividend stocks for long-term income investors to profit from America's bright energy future.