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Kinder Morgan Inc Finally Gives Investors What They Want

Aaron Levitt

When your firm is known for its dividend safety and is primarily held by retirees and other income-seekers, the worst thing you can do is cut your dividend. Pipelines were supposed to be safe tollways that produced plenty of cash flows. So, when the oil bust hit Kinder Morgan Inc (NYSE:KMI) hard and the firm was forced to cut its dividend back in 2015, investors pretty much abandoned Kinder Morgan stock.

Kinder Morgan stock has pretty much languished since that fateful day. But it might not be languishing anymore.

Moves to right the ship at Kinder Morgan have begun to work and KMI has finally given long-suffering shareholders what they wanted all the time — a big return to dividend growth. With its latest mega-sized increase, Kinder Morgan stock is once again on top of the dividend pile. For income-seekers, this could mean that shares could finally be a big-time buy.

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Needed Cut at Kinder Morgan

It’s no secret that the oil slump hurt all manner of energy stocks. And while the pipeline players were supposed to be the safest of the bunch, it turns out they were hit just as hard. Or harder, as was the case at Kinder Morgan.

Thanks to the huge drop in oil prices, KMI’s over-cash flows begun to deteriorate. Meanwhile, its cost of capital to fund its massive expansion projects became even more expensive. The higher cost of capital was one reasons why KMI decided to swallow its own master limited partnership (MLP) subsidiaries and become C-corp.

Caught between a rock and hard place, Kinder Morgan was forced to slash its “good as gold” dividend by a whopping 75% in 2015. That was unexpected and many income-seeking investors were hit hard by the news. Naturally, the huge payout cut sent shares of the dividend stock down the proverbial toilet. And for roughly three years, the investors who stuck around were forced to deal with that much smaller of a payout. KMI saw no dividend growth in that time.

But it seems the decision to slash its payout was a good thing. Over the last three years, KMI has been working on a big turnaround. The former dividend cash has been put to good use elsewhere. Net debt has decreased, while Kinder has been using its cash flows to help fund its expansion efforts. The firm’s balance/cash on hand has gotten fat. At the same time, rising oil and natural gas prices have helped drive flow rates/demand throughout its vast network of pipelines.

Proof Is in the Pudding for Kinder Morgan Stock

All of these efforts have finally come to a head this past quarter for Kinder Morgan. The pipeline firm managed to report some pretty big boosts to its bottom line. KMI’s natural gas pipeline segment managed to see its earnings grow by more than 6% year-over-year, while stronger commodity prices and rising oil production lifted its long-suffering carbon dioxide business by nearly 7%. Finally, the firm’s Canadian operations and Trans Mountain Pipeline saw a big 7% jump in earnings.

The reason? Kinder Morgan’s efforts to reduce capitalized costs for the project. Under its old debt-laden ways, it would have never seen such growth.

All of this rising earnings activity at the hands of better capital management has resulted in one big thing for investors: Cash flows at Kinder Morgan are once again growing like weeds. For the quarter, KMI produced $1.247 billion in distributable cash flows. That was a 4% jump versus a year ago and more than beat its own estimates.

With that huge amount of cash now slogging through its system, KMI was able to raise its dividend for the first time in three years. And it didn’t just raise it. Kinder Morgan sent its payout to the moon by raising 60% to $0.80 per share annualized. The pipeline player also managed to buy back an additional $250 million in shares over the $250 million it purchased in December.

But here’s what’s really great: Kinder Morgan actually managed to produce an extra $804 million in cash flows above what it needs for its newly increased dividend. There’s plenty of extra cash to reduce debt further, boost expansion efforts and pad its balance sheet. There’s no reason why Kinder Morgan won’t be able to do its turnaround dance for another song or two.

Buying Kinder Morgan Stock

With KMI finally turning things around and meaningfully boosting its payout, its status as dividend champion is once again returning. The cut was painful, but clearly the right choice to help it grow and become a better company. Rising cash flows and a return to dividend growth could make it a prime play for income seekers going forward.

Now, Kinder Morgan isn’t perfect. It’s issued by the Canadian government and the previously mentioned Trans Mountain Pipeline expansion is a prime example. And because of that, and its willingness to cut its dividend if it has to, a position in KMI should be on a smallish side.

But as dividend growth returns, the risk/reward with Kinder Morgan stock is certainly moving toward investors’ favor.

Disclosure: As of this writing, the author did not own the aforementioned stock.

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