Morningstar | Kinder Morgan Still On Track to Reduce Debt, Grow Dividend
We are reaffirming our $19.20 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 $0.49 per share, in the third quarter of 2018. This excluded the gain on the sale of the TransMountain project during the quarter.We are reaffirming our 2018 full-year forecasts, including $7.5 billion of adjusted EBITDA, in line with management’s reaffirmed guidance.
Kinder declared another $0.20 per share quarterly dividend, 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-October is attractive given the outlook for dividend growth the next two years.
We think management's focus on debt reduction is a good move given its large flow of cash and limited ways to deploy it in the near term. Management has pledged to reduce debt with the $2 billion of cash it plans to collect early next year from the TransMountain project sale. We think Kinder should consider share buybacks given the stock trades below our fair value estimate.
Higher natural gas volumes remains Kinder's growth driver in the near term, but Kinder's biggest challenge is finding investments big enough to drive core growth beyond 2019. We think Kinder's plan to invest an average of $2 billion annually won't produce substantial earnings growth. Kinder's decision to go forward with its 50% stake in the Permian Highway Project adds $1 billion of growth spending, but we don't expect projects like that to come up often.
Kinder also could use its cash to buy back Kinder Morgan Canada, or KML, which could require several billion dollars of cash. Alternatively, it could sell KML's assets for additional cash proceeds. We expect a decision later this year or early next year after the TransMountain proceeds are paid out.
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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