- Kinder Morgan reported a mixed quarter which is good news for investors.
- Revenue is light, but earnings are strong and fueling capital returns.
- The company is guiding 2023 to earnings and dividend growth.
The energy sector has recently experienced some volatility, but Kinder Morgan (NYSE:KMI) is still a buy. While energy producers, including natural gas producers, have seen their products' prices correct sharply from the post-pandemic highs, demand for natural gas remains high.
This situation has Kinder Morgan in the catbird seat regarding cash flow and dividends, which is good news for income investors.
Trading at 16X its earnings is not so much of a value compared to S&P 500 companies. When compared to the metric that matters, distributable cash flow, that multiple recedes to a level closer to 8X, and it is paying 6% in yield.
6% is more than 3X the average S&P 500 yield; it’s well above what could be considered “high yield” for the index and is a safely growing distribution. What more could an income investor want?
Executive Chairman Richard D. Kinder said,
“Our company closed out the year with another strong quarter. We generated robust earnings and strong coverage of this quarter’s dividend. Company shareholders continue to benefit from our capital-efficient business model that delivers on our time-tested goals: maintain a strong investment-grade balance sheet, internally fund expansion opportunities, pay an attractive and growing dividend, and further reward our shareholders by repurchasing our shares on an opportunistic basis.”
1. Kinder Morgan Beat Earnings Estimates
Kinder Morgan reported a mixed quarter for fiscal Q4, but, as always, the important news is in the details and not the headlines. The company reported $4.58 billion for a gain of 3.4% versus last, but it missed the consensus estimate due to falling natural gas prices.
The salient point here is that margins have expanded due to company efforts, the spread for natural gas, and share repurchases. The company’s net income increased by 5.1%, the distributable cash flow by 11.3%, and adjusted earnings by 16%, all outpacing the top-line growth and above the consensus estimates.
That is good news from the earnings perspective and has this company set up for a double tailwind should natural gas prices begin to rebound.
2. Kinder Morgan Guides Strongly (enough)
Kinder Morgan reiterated its guidance for earnings and distributable cash flow despite the top-line weakness in Q4. The company is expecting to generate $1.12 in adjusted EPS which is in line with the consensus, and to pay $1.13 in dividends.
The dividend projection is a 2% increase versus the 2021 period, and these estimates may be light. The company expects demand for natural gas to double in “the coming years,” which is a powerful tailwind for revenue, income, and distributable cash flow.
3. Kinder Morgan Increases Capital Returns
Kinder Morgan is in the business of natural gas distribution. Still, its business delivers capital to shareholders in the form of dividends and share repurchases. The company stock is yielding more than 6.0% at the time of the Q4 release, and there is an expectation for distribution growth.
The payout ratio, at face value, is troubling because it runs near 100% but, like with the earnings multiple, when compared to the DCF, drops to about 50%. Regarding repurchases, the company upped its buyback allotment by $1 billion to $3 billion, leaving just over $2.0 billion to be used in calendar 2023. That’s worth about 5% of the market cap and is yet another tailwind for price action.
The Technical Outlook: Kinder Morgan Could Pop Any Time
Shares of Kinder Morgan are trading in a tight range below the pre-pandemic level despite the revenue, earnings, and dividend surpassing those same levels. In this light, shares of KMI should be trading at least at the $22 level, which would be a near 25% gain for investors.
That target is slightly above the analyst's consensus, but the Marketbeat.com consensus estimate is trending higher and may move higher again now the Q4 results are out. The next major hurdle for the market is at the $19.30 level, a move above there would be bullish and could take the market up to $21 or higher.
