What Makes This Energy Pipeline Giant a Strong Dividend Stock? 🛢️

Thanks to what Kinder Morgan does and how it operates, this energy pipeline giant looks capable of paying its hefty dividend for quite some time to come.

American energy pipeline giant Kinder Morgan (NYSE: KMI) looks potentially capable of paying dividends to its shareholders for decades to come. It’s rare to make such a statement about any company, since predicting the future is very difficult to do. It’s especially rare to say something like that about a company that was forced to cut its dividend by a bit more than 75%,  just a few years ago.

So that raises a key question: exactly what makes Kinder Morgan such a strong dividend stock? It’s a combination of the market it operates in, the future for its services, and the fact that it has been operating with a very clear “once bitten, twice shy” attitude ever since that dividend cut. Of course, the fact that it offers shareholders a 6.6% yield  that is well covered by its operating cash flows  certainly helps as well.

Why its market matters
As a pipeline company, Kinder Morgan is involved in transporting energy sources like oil and natural gas throughout the United States. Its network of around 82,000 miles of pipelines offers one of the lowest cost and least dangerous means of getting that energy from where it’s produced to where it’s processed or consumed. That means that as long as those forms of energy are being consumed, pipeline services are likely to remain in demand.

That high expected demand means that the company has been able to negotiate a remarkably stable set of revenue sources. According to its May 2023 investor presentation: 

•    61% of its revenues are “Take or Pay” contracts (guaranteed payments, no matter what)
•    26% are “fee based” (payments based on the volume transported, not the price of the fuel)
•    6% are “hedged” (payments protected by financial instruments offsetting market price risks)

That leaves a mere 7% of its revenues exposed to commodity pricing. That leaves 93% of its business where its revenues are either guaranteed or, at minimum, are not exposed to the whims of the commodity markets it serves. That’s a very reliable source of revenue for the company when it comes to its ability to offer a payment to its shareholders.

What about the future?
Still, the big question on Kinder Morgan’s business is whether oil and natural gas will still be heavily used, given the recent push for less carbon-intensive energy sources. On that front, the United States Energy Information Administration projects that the oil and natural gas demand should remain fairly steady through 2050. That holds true even under the EIA’s most optimistic projections for green energy. 

As a result, since oil and natural gas demand is expected to remain steady for decades to come, it gives good reason to believe that Kinder Morgan will be able to pay its dividends for decades to come. Of course, steady — rather than rising — demand for oil and natural gas doesn’t exactly translated to much potential growth, but that’s a key reason why its yield is so high. 

Earlier this year, Kinder Morgan did manage to increase its dividend payment by about 1.8%, which is about what you can expect from a business that is geared towards fairly stable operations.

How it learned from its past dividend cut
Of course, Kinder Morgan’s 2015 dividend cut did spook investors at the time.  Yet what the company did in the wake of that cut should give prospective investors a reason to believe that it’s serious about protecting its dividend in the future.

Kinder Morgan took advantage of its reduced dividend to drastically clean up its balance sheet — paying off a lot of debt  and self-financing its capital expenditures from its operating cash flows. That far more disciplined approach makes it much more likely that it will be able to maintain its current payment as long as its operations continue strong. It’s a “once bitten, twice shy” approach to its capital management, and it’s one that goes a long way towards protecting its ability to keep its dividend strong.

Put it all together to get a strong dividend stock
While there are never any guarantees in investing, there are certainly good reasons to believe that Kinder Morgan can maintain its dividend for quite some time to come. That solid foundation, decent current yield, and willingness to increase its payment when it can reasonably do so all add up to a company that fits the bill for a strong dividend stock. 

At the time of publication, Chuck Saletta owned shares of Kinder Morgan.

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