Can Kinder Morgan sustain its dividend?
The energy sector at large can be volatile, but intermediary companies such as Kinder Morgan (NYSE: KMI) are supposed to be fairly consistent. This is because, in many cases, they are charged for transporting oil and natural gas – so commodity price volatility is not a big deal. But after a decline in 2016, investors should closely monitor Kinder Morgan’s dividend-paying ability. Here are some essential facts.
The bottom of the cup
Times were tough in the energy sector in 2016, and accessing capital markets for cash was difficult. With heavy debt loads, Kinder Morgan was forced to choose between supporting its dividend or using that money to make the long-term capital investments that would grow its business. The middleman giant made the right choice for the company, but investors who trusted it to be a reliable dividend payer were disappointed.
Image source: Getty Images.
This is where the big problem really comes in, as just months before the cut, management had told investors to expect dividends of up to 10%. It would be completely understandable for more conservative investors to choose to miss out on Kinder Morgan because of this confidence-destroying choice. For the more aggressive types, however, Kinder Morgan has worked hard to regain investor confidence. This includes dividend increases each year since 2018.
To be fair, the company had an aggressive plan for its post-cut dividend, and it fell short. This is because the energy slowdown caused by the pandemic in 2020 caused Kinder Morgan to increase its dividend by 5% instead of the 20% increase it had originally predicted. But the reason for this change is notable: the management fundamentally did not want to find themselves in the position of cutting distribution again. Indeed, he focused on the continued financial strength of the company and its ability to pay dividends.
Similar but different company
So where is Kinder Morgan sitting today? In the third quarter of 2021, Kinder Morgan’s distributable cash flow hedged the dividend payment 1.6 times. That’s a pretty solid hedge, and it leaves a lot of room for adversity before the dividend is threatened. To be fair, the dividend increase in 2021 was around 3%, very modest. Dividend growth therefore remains slow – but given the times of clean energy this probably makes sense, and it clearly preserves the strength of the payout underpinning the generous 6.5% dividend yield of the company.
EPD financial debt / EBITDA (TTM) data by YCharts
But what about the balance sheet, which was a big deal when the dividend was cut in 2016? The mid-market giant’s debt-to-earnings before interest, taxes, depreciation and amortization (EBITDA) ratio is no different than its closest peers. It’s not the lowest of the bunch, but it’s definitely not the highest either. Perhaps most importantly, the current level of around 5.1 is down materially from the high of over 9 reached in 2016. The company that it has recognized is to be credited with a significant problem with dividend security and has taken significant steps to address it.
KMI financial debt data on EBITDA (TTM) by YCharts
Kinder Morgan still intends to invest in growth, with a $ 1.3 billion backlog that will carry it through 2023. However, he’s working there with a very different financial base and a different perspective on. the dividend. Essentially, dividend security has grown in importance, and it shows in the company’s good dividend coverage ratio, recent caution with dividend increases, and its more conservative balance sheet.
(Dividend) safety first
Kinder Morgan appears to have turned a new leaf on the dividend front since the 2016 cut. This is great news for income investors looking to find a high yield option in the energy patch. Really conservative guys with trust issues because of the 2016 cut (after the company promised a raise) will probably never give Kinder Morgan a second chance. But those who can look to the future with an open mind may want to take a closer look. The dividend does indeed seem fairly secure today.
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Reuben Gregg Brewer has no position in the stocks mentioned. The Motley Fool owns shares and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.