Anticipating Continued Expansion in 2025, Kinder Morgan Ponders if Its High-Dividend Share is a Worthy Investment Currently
Kinder Morgan, the pipeline and energy infrastructure giant, experienced a remarkable surge of 55% in 2024, mirroring the rebound in the oil and gas midstream industry. The company reported its fourth-quarter and full-year earnings, providing insights into its performance and future outlook.
A prosperous year for Kinder Morgan
Kinder Morgan's adjusted earnings per share (EPS) saw a 7% increase in 2024. The company managed to meet its dividend expense with free cash flow (FCF), despite a 13.5% increase in capital expenditures (capex). The company is currently spending a five-year high on long-term projects, following a straightforward business model of building capital-intensive pipelines, terminals, storage facilities, and charging customers for usage.
The surge in Kinder Morgan's stock price in 2024 wasn't driven by earnings growth but rather shifting perceptions of its existing assets and the growth potential of its future projects.
Shifting perspectives and forward momentum
Kinder Morgan has faced its fair share of challenges. The company suffered tremendous losses during the 2014 and 2015 oil and gas downturn, slashing its dividend to preserve capital. After the downturn, Kinder Morgan tightened its belt financially and refocused its strategy on rebuilding with its highest-conviction projects, gradually increasing its dividend.
However, investor confidence in oil and gas assets remained low due to concerns about the long-term value of these assets, considering the potential decline in oil and gas demand. But the rise of U.S. oil and gas production, especially in the Permian Basin, increased the need for increased takeaway capacity. Additionally, the U.S. experienced a boom in liquefied natural gas exports and set itself up for potential future oil and gas export.
Then came the latest catalyst: artificial intelligence (AI). Data centers require sufficient energy to support complex AI workflows, and Kinder Morgan sees natural gas as a critical energy source for the growing U.S. grid. Although renewable energy such as solar and wind will play a significant role in the U.S. energy mix, the demand for natural gas may still increase due to overall energy demand growth.
Kinder Morgan CEO Kim Dang spoke about the opportunity presented by AI infrastructure, emphasizing the administration's support of increased data center development and the potential for U.S. energy to do well.
Balancing growth, dividends, and financial health
For 2025, Kinder Morgan forecasts net income of $2.8 billion, an 10% increase from 2024, along with adjusted EPS of $1.27. The company plans to increase its dividend by 2%, pay $1.17 per share in dividends for 2025, and maintain a net debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 3.8.
Kinder Morgan's history of managing leverage is not impressive; however, the company's commitment to financial health and responsibility in investing in the business is encouraging. The stock still boasts a competitive price-to-earnings (P/E) ratio of 24.2 based on 2025 adjusted EPS guidance and a solid 3.7% dividend yield.
Alternatives for investors
While Kinder Morgan is a strong midstream company, there are alternatives available for investors seeking different investing opportunities:
- ExxonMobil and Chevron: These two companies are meeting investor demand for foundational holdings in the oil and gas industry. ExxonMobil offers a yield of 4.1%, and Chevron is paying a dividend of 4.2%.
- Vanguard Energy ETF: Investors interested in diversifying their midstream portfolio can consider the Vanguard Energy ETF, which holds Kinder Morgan, ExxonMobil, Chevron, and other major players like Williams Companies and ONEOK.
Kinder Morgan's strong growth prospects, increased demand for natural gas, extensive infrastructure network, and commitment to financial stability make it an attractive investment opportunity within the midstream sector.
Seizing Opportunities and Sustained Growth
Despite the surge in Kinder Morgan's stock price, investing in the company could still provide significant returns for shareholders. With a 55% increase in 2024, the company's valuation might seem high, but given the promising future outlook, one could consider it a sound investment in the finance sector.
Diversifying Strategy and Synergies
The company's diversification into the AI infrastructure sector, driven by the growing demand for energy for data centers, presents an intriguing investment opportunity. By focusing on natural gas as a critical energy source, Kinder Morgan is strategically positioning itself to cater to the growing energy demands while also tapping into the potential of U.S. energy exports.
