Last year, many publications suggested that Kinder Morgan (NYSE: KMI) was a buy because its 6.75% yield appeared to be overly generous and unlikely to remain so high in comparison with share prices for long. Now, a year later, we agree with that outlook with this correction: Kinder Morgan's yield is too favorable, and it is unlikely to stay at 6.2% for long, even if there are future dividend hikes.
Kinder Morgan stock is not only appealing in its own right, but the company's yield and value make it a no-brainer when compared to the average S&P 500 corporation or even the Ten-Year Treasury in terms of income investing. The Ten-Year Treasury may be a "safer" investment and have a higher yield, but the most aggressive interest rate projections compare to Kinder Morgan's yield and growth outlook. What's more, the S&P 500 is trading at 20 times earnings with a dim outlook and yields 500 basis points less.
A Growing Dividend
The Kinder Morgan Corporation had a very good quarter, with revenue surpassing expectations and earnings sufficient to cover the dividend. The firm stated revenue of $4.43 billion, which is up $4.43 billion over last year and above the forecast by 2200 basis points. There have been some acquisitions over the last year, therefore the figures may not be directly comparable, but they are bolstered by organic growth and vitality in the new businesses. The main takeaway is that cash flow, earnings, and profits all exceeded analyst expectations, with adjusted fourth-quarter EPS of $0.27 a penny better than anticipated.
The only thing to be concerned about is that overall distributable cash flow decreased on a YOY basis, however there are one-time effects impacting the results such as integration costs from acquired firms. Regardless, the DCF of the firm covered the dividend with a dividend-to-DCF ratio of around 53%. More significantly, management expects profits to rise by 40% and dividends to grow by 3.0%. which may be compounded by additional acquisitions and/or share repurchases. KMI Executive Chairman, Richard D. Kinder stated:
“Our assets once again generated robust Adjusted Earnings and strong coverage of this quarter’s dividend. The company provides our investors with dependable value grounded on stable cash flows and a time-honored corporate philosophy: fund our expansion capital opportunities internally, maintain a healthy balance sheet, and return excess cash to our shareholders through dividend increases and/or share repurchases.”
Analysts And Institutions Are On Board
The analysts give Kinder Morgan stock a Hold rating, but it's a firm Hold with a consensus price target that has been on an upswing for the previous year, 90 days, and 30 days. According to the most recent thinking, a gain of roughly 4% is expected, with another 16% owing to the high price target. The high price target of $21 was established by Mizuho in December, when the firm reduced its objective by a dollar while retaining one of two Buy ratings (out of 11 ratings total). The institutions have been fluctuating into and out of the stock for the past year, but net activity is positive and reflects a greater than 1.5 percent share ownership. The stock is about evenly divided among institutions and insiders, with institutions owning 59% of the equity and insiders holding 14%.
Kinder Morgan's stock has been rangebound for a year or two, but it appears to be moving up within that range now. The recent price movement has shares heading strongly higher and away from a key support level, reaching new all-time highs and confirming support at a new, higher level. If the $17.40 support holds, we expect this stock to rise up to the top of the post-COVID range near $19 and then advance.