Pipeline giant Kinder Morgan (NYSE:KMI) could be positioning itself to offer retirees sustainable income by emerging much stronger from the problems that originally forced it to cut its dividend in late 2015. It might seem crazy to consider a company whose most recent dividend move was a 75% cut as being capable of offering sustainable income, but Kinder Morgan just might be able to pull it off.
The reason is simple: Unlike many companies forced by poor operating results to slash their dividends, Kinder Morgan was forced to make the cut by its balance sheet, rather than its operations. After Kinder Morgan acted as something of a white night to bail out the struggling Natural Gas Pipeline Company of America, Moody's threatened to downgrade its debt to junk status because of its increased leverage. That set off the chain of events that led to Kinder Morgan's dividend cut to protect its debt rating.
Today's Kinder Morgan: stronger and better than before
By cutting its dividend, Kinder Morgan freed up billions in cash flow. It took those billions and put them toward shoring up its balance sheet and internally funding many of its expansion plans. With its shored-up balance sheet, Kinder Morgan is no longer considered at risk of a downgrade to junk status by Moody's. That's a huge win that maintains Kinder Morgan's access to investment-grade borrowing for future expansion plans or for refinancing existing debts.
Since Kinder Morgan was also able to fund a portion of its expansion plan from its existing cash flows, as those expansion plans come online, they will generate more cash for the company. That additional cash represents money that Kinder Morgan can either choose to reinvest in its business (to generate even more cash) or to pay out to its shareholders in the form of increasing dividends. And on that front, Kinder Morgan has already indicated that it hopes to be able to increase its dividend in 2018.
While there are no guarantees until a dividend is declared, Kinder Morgan's history of increasing dividends before that late 2015 cut adds a reason to believe it may be able to make it happen. In addition, the company's CEO, Stephen Kean, receives a $1 salary, continuing the tradition of company founder Rich Kinder. That salary better aligns the CEO's compensation with shareholders, as it makes dividend income a significant portion of his take-home and gives him an incentive to increase dividends.
Still an energy tollbooth
Underlying all of that cash flow is a company that essentially operates as an energy tollbooth. 91% of its cash flows come from fee-based services -- such as energy transportation. An additional 6% comes from hedged businesses, leaving a mere 3% exposed to commodity price fluctuations. Virtually no matter what happens to energy prices, Kinder Morgan would still collect its fees for moving that energy around.
In theory, of course, the bankruptcy of enough energy producers could cause oil and natural gas to stop flowing through its pipelines, or force a renegotiation of transportation fees. Even then, as long as there's demand for energy in places far away from where it's produced, that energy has to move to get where it's needed. An already-existing pipeline is typically a relatively low-cost way to move that energy from supply to demand.
It's that energy tollbooth-style operation that should give investors confidence that the company's dividend should be sustainable at current levels. If Kinder Morgan does resume increasing its dividends, a significant level of increases would also be covered by its tollbooth-like operations.
Once bitten, twice shy translates to your opportunity
Still, investors have reason to be nervous -- especially investors who rely on their stocks for a significant portion of their incomes. The last change to Kinder Morgan's dividend was a 75% cut back in late 2015, which sent its shares tumbling. Investors who held its shares for income then not only saw their incomes slashed, but they also saw their capital shrink, making it problematic to try to replace that income elsewhere.
Nevertheless, what matters to today's investors is the future, not the past. Kinder Morgan's stronger balance sheet, still strong tollbooth-style operations, and management team with an incentive to sustainably increase its dividend all point to a potential for sustainable income well into the future. Investors who can look past its late 2015 stumble have the opportunity to pay a reasonable price for today's dividend income and have a very real chance at seeing increases to that income in the future.
Chuck Saletta owns shares of Kinder Morgan and has the following open options positions in it: Synthetic Long Jan 2018 @ $17.50, Short Strangle June 2017 @ $20/$24. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.