Morningstar | Kinder Keeps Dividend Growth On-Plan; Search For Investment Opportunities Continues
We are reaffirming our $19 per share fair value estimate, along with our no-moat and stable moat trend ratings, after Kinder Morgan announced earning $1.1 billion of distributable cash flow, or $0.50 per share, in the second quarter of 2018. The company remains on track to meet our full-year forecasts.Kinder declared a $0.20 per share quarterly dividend for the second consecutive quarter, up 60% from last year and in line with management's plan to reach $1.25 per share annualized by 2020. We think Kinder's 4.5% dividend yield as of mid-July is attractive given the outlook for dividend growth the next two years.
Kinder continues to be cash rich and will add some $2 billion when its TransMountain project sale closes later this year. Shareholders should watch closely how management deploys this cash. Management said they are prioritizing debt reduction in the near term. We continue to think share repurchases will be value-accretive since the stock price is below our fair value as of mid-July.
Kinder's biggest challenge is finding investments big enough to drive core growth. We expect Kinder will invest an average of $2 billion annually, however this won't produce significant earnings growth. The recently announced Permian Highway Project could add $1 billion of growth if Kinder decides to go forward. The under-construction Gulf Coast Express also represents nearly $1 billion of investment in 2018-19. Both should be high-return projects by expanding Kinder's existing network.
Kinder's first-half results keep it on track to meet our 2018 full-year forecasts, including $7.5 billion of adjusted EBITDA, in line with management’s reaffirmed guidance.
The fate of Kinder Morgan Canada, or KML, also could impact Kinder's cash on hand. Kinder could decide to buy back KML, which could require several billion dollars of cash, or it could sell KML's assets for additional cash proceeds. We expect a decision later this year.
Kinder Morgan is an energy infrastructure company. The company's segments are: Natural Gas Pipelines, which includes the ownership and operation of, among others, main interstate and intrastate natural gas pipeline and storage systems; Products Pipelines, which includes the refined petroleum products, crude oil and condensate pipelines; Terminals, which includes the ownership and/or operation of, among others, liquids and bulk terminal facilities; and carbon dioxide (CO2), which includes the production, transportation and marketing of CO2, ownership interests in and/or operation of oil fields and gasoline processing plants in West Texas.
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