Kinder Morgan will generate billions of dollars in cash flow while expanding future production capacity.
Many technology and artificial intelligence (AI) stocks will soar in 2024. But every portfolio needs some diversity. Investors sometimes think that means giving up the potential for big profits in sectors like the tech industry in exchange for safer, higher-yielding stocks.
However, one company that pays a large dividend will underperform the S&P 500 index in 2024. Including dividends, energy infrastructure giant Kinder Morgan (KMI 0.52%) stock’s total return has actually been twice that of the index since the beginning of the year through mid-October. . Even for those who missed out on the recent rally, there are still good reasons to invest in Kinder Morgan.
KMI Total Return Level Data by YCharts
cash flow is king
The soaring price of Kinder Morgan stock stems from some fundamental success. The company’s operations generate enough cash flow to accomplish several things that make it a good investment. Most importantly in the long term, Kinder Morgan continues to fund promising capital projects from internal cash generation.
This includes the $1.8 billion acquisition of STX Midstream from NextEra Energy Partners, which was completed late last year. These assets include a series of pipelines connecting the Eagle Ford Basin in Texas to the growing Gulf Coast and Mexican markets. It also consists of a recently commissioned midstream pipeline that connects to Kinder Morgan’s new Eagle Ford pipeline, which will enter service in late 2023. This capital investment will pay dividends for investors for many years, as the majority of the business is supported by take-or-pay contracts. The average contract length is over 8 years.
The company recently completed nearly $500 million in new investments to expand the Gulf Coast Express Pipeline, which increases the transportation of natural gas from the Permian Basin to South Texas markets. But importantly for investors, capital spending on midstream natural gas production capacity is expected to peak this decade. This means that shareholders will receive even more profits in the future.
Meanwhile, these growth investments are being funded by cash flow from operations, which totaled nearly $3 billion over the past six months. Beyond capital expenditures, the company generated $1.7 billion in free cash flow during that time. The company will use its excess cash to increase dividends and keep debt levels well below its previously announced target of 4.5 times net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA). . The index has fallen 26% since 2016 and is expected to reach 3.9 by the end of the year. As a result, the company was able to return to shareholders an amount equivalent to approximately 41% of its market capitalization at the time.
Broader energy trends
But these numbers aren’t everything. The trend for investors to boost Kinder Morgan stock is even more common. In its third quarter report, Chairman Richard Kinder said, “Domestic and global natural gas demand is expected to increase significantly in the coming decades, and many opportunities lie ahead.” .
Natural gas consumption in the United States has been steadily increasing for many years. Kinder’s statement is supported by these existing trends, as well as predicted increases in energy demand due to the massive construction of data centers for AI computing power and the increased use of electric vehicles. .
bet on the leader
Kinder Morgan’s pipeline already transports about 40% of U.S. natural gas production. Its infrastructure is virtually irreplaceable. Thanks to Kinder Morgan, investors are seeing the company become a leader in a market in which it continues to invest heavily. And they collect increasing dividends in the process.
The dividend was significantly reduced in 2016 as the company shifted focus to improving its debt levels and cash flow. But as those goals were met, the dividend steadily increased. Even after the share price has risen this year, the dividend yield remains high at 4.6%.
It’s never too late to buy a Kinder Morgan. Even if the stock doesn’t repeat the same level of outperformance over the next year or two, the yield provides investors with a significant return in the short term. However, the company is also well-positioned to take advantage of future trends, and shareholders should also benefit from future capital gains.
Howard Smith has a position at Kinder Morgan. The Motley Fool has a position in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
