Kinder Morgan: Balancing The Attractive Dividend Yield With Elevated Risks

IvelinRadkov Investment Thesis This Wednesday, 17th July 2024, Kinder Morgan, Inc. (NYSE:KMI) released its latest earning results. The company presented second quarter adjusted earnings per share [EPS] of $0.25, which is an increase of 4% compared to the same quarter of the previous year. I believe that Kinder Morgan can be an attractive addition to a dividend income-oriented investment portfolio, helping you to increase the Weighted Average Dividend Yield of your overall portfolio and to increase the amount of dividend payments to a low degree on an annual basis. The company pays an attractive Dividend Yield [FWD] of 5.68%, while it has shown a 5-Year Dividend Growth Rate [CAGR] of 5.95%. In addition, it can be highlighted that the company showcases impressive Profitability metrics, underlined by an EBIT Margin [TTM] of 27.77% (which is 45.03% above the Sector Median). However, I see several risk factors for Kinder Morgan investors, including a possible reduction of the company’s dividend in the future, its limited growth perspective (EPS Diluted Growth [FWD] of 2.53%), and the fact that I believe it is presently overvalued (P/E [FWD] Ratio of 16.67, which is 34.72% above the Sector Median). For these reasons, the company presently receives my hold rating. Kinder Morgan’s Latest Earnings Results Last Wednesday, Kinder Morgan presented second quarter adjusted earnings per share [EPS] of $0.25 and distributable cash flow [DCF] per share of $0.49, representing increases of 4% and 2%, respectively, compared to the same quarter of the previous year. It is further worth highlighting that the company’s board of directors approved a cash dividend of $0.2875 per share (which is an annualized dividend of $1.15) for this second quarter of 2024. This is an increase of 2% when compared to the same quarter of the previous year. These results underline Kinder Morgan’s potential to steadily increase its dividend, making the company an attractive pick for investors looking to combine dividend income and dividend growth. However, the results do also reflect the company’s limited prospects regarding dividend growth. Kinder Morgan’s Current Valuation Today, Kinder Morgan showcases a P/E [FWD] Ratio of 16.67, which is 34.72% above the Sector Median. This metric indicates that the company is presently overvalued. The same is indicated when looking at the company’s Dividend Yield [TTM] of 5.61%, which is below its Average from the past 5 years (6.24%). Source: Seeking Alpha Kinder Morgan’s Dividend and its Dividend Growth Outlook Kinder Morgan presently pays a Dividend Yield [FWD] of 5.68%, which is attractive for dividend income-oriented investors, particularly when considering the company’s 5-Year Dividend Growth Rate [CAGR] of 5.95%. This mix of dividend income and dividend growth makes the company an attractive option for The Dividend Income Accelerator Portfolio. I have added the company to my watch list and will consider adding it to the portfolio in the future. However, I will wait for a more beneficial Valuation of the company. The chart below illustrates Consensus Dividend Estimates for Kinder Morgan. The Consensus Yield for 2024 stands at 5.68%, at 5.83% for 2025, and at 6.02% for 2026. These metrics underline my statement that Kinder Morgan is an attractive pick for dividend investors. Source: Seeking Alpha The Projection of Kinder Morgan’s Dividend and Yield on Cost The chart below illustrates a projection of Kinder Morgan’s Dividend and Yield on Cost when assuming that the company would be able to increase its dividend by 2% per year on average over the next 30 years. This assumption is based on the company’s 3-Year Dividend Growth Rate [CAGR] of 2.39% and the latest dividend increase of 2% (as shown previously). The graphic shows that you could reach a Yield on Cost of 6.63% by 2034, 8.08% by 2044, and 9.85% by 2054. Source: The Author The graphic highlights Kinder Morgan’s ability to combine dividend income and dividend growth, but also reflects the company’s limited ability to grow its dividend. Kinder Morgan’s Profitability In addition to the above, it can be highlighted that I see Kinder Morgan as an attractive pick in terms of Profitability, which is underlined by the Seeking Alpha Profitability Grade of A-. The company has an EBIT Margin [TTM] of 27.77%, which is 45.03% above the Sector Median of 19.15%, underlying the company’s financial strength. Source: Seeking Alpha Kinder Morgan’s Limited Growth Outlook However, it is worth highlighting that Kinder Morgan has a limited growth perspective, which is underlined by different growth metrics: the company has shown a negative Revenue Growth Rate [FWD] of -2.96% and a relatively low EPS Diluted Growth [FWD] of 2.53%. Kinder Morgan’s reduced EPS Diluted Growth Rate also reflects its low potential for dividend growth in the future, indicating that it is less attractive for investors looking for companies with strong dividend growth potential. Risk Factors To Consider I see several risk factors for investors that are considering an investment in Kinder Morgan. One of which is a possible reduction of Kinder Morgan’s dividend, which would adversely affect the company’s stock price. It is worth highlighting that Kinder Morgan presently exhibits a Dividend Payout Ratio [FY1] [Non-GAAP] of 95.45%. In addition to that, it can be highlighted Kinder Morgan’s Cash Flow Payout Ratio [FY1] of 45.65%, which is 121.80% above the Sector Median, indicating elevated risks for a dividend reduction when compared to competitors. Even though Kinder Morgan receives a B- rating from Seeking Alpha in terms of Dividend Safety, I do not see the company’s dividend as being entirely safe. Another risk factor for Kinder Morgan investors is the company’s elevated Valuation. As mentioned in the Valuation section of this analysis, Kinder Morgan presently has a P/E [FWD] Ratio of 16.67, which stands 34.72% above the Sector Median. This indicates an elevated downside risk for investors of Kinder Morgan, thus representing an additional risk. Another risk factor for investors is the company’s limited growth perspective, reflected by a low EBIT Growth Rate [YoY] of 0.76% since it limits investors’ potential for dividend growth and capital appreciation. The Case for a 2.5% Allocation Limit for Kinder Morgan to Reduce the Company-Specific Allocation Risk of Your Dividend Portfolio Given Kinder Morgan’s elevated risk level, in particular a result of a possible reduction of its dividend, the company’s overvaluation, and limited growth perspectives, I recommend setting an allocation limit of 2.5% for the company when compared to your overall portfolio. This approach will help you to reduce the company-specific allocation risk of your investment portfolio and increase the likelihood of reaching attractive investment results when investing over the long term. Conclusion I believe that Kinder Morgan can be an attractive choice for dividend income investors to benefit from today onwards thanks to an attractive Dividend Yield [FWD] of 5.68% and the potential for an annually increasing dividend, albeit slowly. However, I believe that the risk factors for investors are elevated. Among other factors, investors need to consider the company’s limited growth perspective, a possible reduction of its dividend, and the fact that I consider Kinder Morgan to be presently overvalued (its P/E [FWD] Ratio of 16.67 stands 34.72% above the Sector Median). In addition, I believe that the growth perspective for the company is limited, which is reflected by a low 3-Year Dividend Growth Rate [CAGR] of 2.39% and its negative Revenue Growth Rate [FWD] of -2.96%. Due to these elevated risk factors, including the company’s overvaluation and limited growth perspective, I currently rate Kinder Morgan as a hold. I suggest waiting for a more attractive entry point to benefit from the company’s attractive Dividend Yield. For those who decide to invest in the company, I suggest a 2.5% allocation limit due to the company’s elevated risk level. This approach allows you to decrease the company-specific allocation risk of your portfolio, while, at the same time, helping you to maximize investment returns.

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