Pipeline and energy infrastructure giant children morgan (NYSE: KMI) That number will soar 55% by 2024, in line with a rebound across the oil and gas midstream industry. The company reported fourth-quarter and full-year earnings on Wednesday and provided guidance for 2025.
Here are some key takeaways from the report, along with some guidance on whether high-yield dividend stocks are worth buying now.
Kinder Morgan's adjusted earnings per share (EPS) will grow 7% in 2024. The company will generate lower free cash flow (FCF) in 2024 compared to 2023, but will still be able to fund its entire dividend payout (capital expenditures) with FCF despite a 13.5% increase in capital.
Kinder Morgan's capital spending hit a five-year high as the company ramps up spending on long-term projects. The business model is quite simple. Kinder Morgan builds capital-intensive pipelines, terminals, storage facilities and more and then charges customers to use the infrastructure. This is similar to the toll road strategy, which costs a lot of money upfront but generates future cash flows over the life of the asset.
Kinder Morgan's stock price surge in 2024 is not because of its good earnings growth. Rather, it's due to a shift in perspective on its existing assets and growth runway for future projects.
Despite Kinder Morgan's sharp gains last year, its shares are still down 26% over the past decade. The company was overleveraged and hit hard by the oil and gas downturn in 2014 and 2015, so it slashed its dividend to shore up capital.
In the wake of the recession, Kinder Morgan has tightened spending and focused on rebuilding its business based on the projects in which it is most confident. Kinder Morgan has gradually increased its dividend but remains out of favor as investors question the long-term value of its oil and gas assets. After all, if demand for oil and natural gas is expected to gradually decline, the value of Kinder Morgan's existing assets is likely to decline as well. And it doesn’t justify building new projects.
But a surge in U.S. oil and gas production, particularly in the Permian Basin in western Texas and eastern New Mexico, has prompted concerns about increasing outbound shipping capacity to move hydrocarbons out of the region. greater demand. The boom in U.S. LNG exports has expanded the U.S. natural gas market and laid the foundation for the U.S. to become a net exporter of oil and natural gas, thereby increasing demand for energy infrastructure.
Then there’s the latest catalyst: artificial intelligence (AI). Data centers are needed to support complex and energy-intensive AI workflows. Kinder Morgan firmly believes that natural gas is critical to providing reliable energy to the growing U.S. grid.
Therefore, even as the U.S. energy mix includes more solar and wind over time, demand for natural gas is likely to increase as overall energy demand increases.
Kinder Morgan CEO Kim Dang said during an earnings call in response to analysts' questions about the new U.S. administration's announcement of a $500 billion investment in AI infrastructure:
I think we're in the early days of the data center trend, and there's a need for power there. So I think the current administration's encouragement of data center development... I think they want to see U.S. energy perform well, and that all creates good long-term trends for natural gas demand.
However, natural gas demand is expected to increase by 28 bcf/d between now and 2030, while power generation is expected to contribute only 3 billion cubic feet/d, Dang said. In other words, Kinder Morgan could benefit from AI driving power demand, but it doesn't expect it to be a major driver of growth in the medium term.
Kinder Morgan expects net profit in 2025 to be US$2.8 billion and adjusted earnings per share of US$1.27, an increase of 10% from 2024. It's expected to increase its dividend by 2% and pay $1.17 per share in 2025 - a sizeable chunk of its earnings.
Kinder Morgan's dividend growth has been very minimal in recent years, which is not a good sign. But it's probably a smart move so the company still has excess capital to reinvest in the business and drive growth. What's more, Kinder Morgan's yield has reached 3.7%. Therefore, there is no need to significantly increase the dividend.
The company expects net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be 3.8 by the end of 2025. It has a gearing ratio of 4 as of 2024 and a long-term leverage target range of 3.5 to 4.5.
Given Kinder Morgan's poor track record of managing leverage, it's encouraging to see the company continue to prioritize financial health over overspending.
Based on the share price at the time of writing and 2025 adjusted earnings per share guidance of $1.27, the stock trades at 24.2 times earnings. So it's not a cheap stock by any means, which makes sense as share price gains in 2024 far outpace earnings growth. But since Kinder Morgan shares were so cheap last year, the valuation remains reasonable.
Kinder Morgan has been an unpopular stock over the past few years. Now, it's back in favor thanks to renewed strength in oil and gas, the potential upside from AI-driven power demand and government support for increased oil and gas production.
Kinder Morgan is a solid choice, but not worth screaming about right now. It used to be a super high-yield stock, but now its income is the same as that of ordinary stocks. Exxon Mobilof and lower than ChevronThe yield is 4.2%. Investors looking for fundamental holdings in the oil and gas industry may now consider Exxon Mobil or Chevron rather than Kinder Morgan.
Another option is low-cost exchange-traded funds (ETFs) such as Vanguard Energy ETFamong which ExxonMobil, Chevron, Kinder Morgan and other midstream companies such as williams & co. and Ook It is 5 of the 10 largest holding companies.
Before buying Kinder Morgan stock, consider the following factors:
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool owns and recommends Chevron and Kinder Morgan. "Motley Fool" recommends Oneok. The Motley Fool has a disclosure policy.
Kinder Morgan expects continued growth in 2025, but is it a high-yield dividend stock worth buying now? Originally posted by The Motley Fool