Companies with high dividend yields tend to be past their prime. Their growth prospects are lacking, which is why they're allocating more of their free cash flow towards paying dividends.
That used to describe Kinder Morgan (KMI -1.06%). The natural gas pipeline giant's earnings had leveled out in recent years due to slowing demand growth for gas. Because of that, it has only been growing its high-yielding dividend (currently 3.7%) at a modest annual rate (around 2% per year).
However, the natural gas industry is starting to experience a rival, fueled by growing power demand for AI data centers and other catalysts like the onshoring of manufacturing. "This is the most exciting time to be in the midstream natural gas market that I've seen in my long decades in this business," stated Kinder Morgan's co-founder and Executive Chair Richard Kinder on its fourth-quarter conference call. Here's a look at all the growth it has coming down the pipeline.
Capitalizing on the gas resurgence
Richard Kinder commented on how the recent growth resurgence has impacted its business on the fourth-quarter call. He stated, "These drivers are creating enormous opportunities for expansion of the natural gas pipeline and storage system across America and especially in the Gulf Coast and Southeast regions." He then outlined the company's response to these opportunities.
Kinder noted:
In the last few months, we have announced the FID (final investment decision) of four new major projects: the expansion of our GCX system out of the Permian Basin; our SS4 Expansion on our Southern Natural Gas system; our Mississippi Crossing line, which will serve as SS4 and other increased demand in the Southeast; and our Trident line, which we announced today, which will serve growing demand in the Southeast Texas region, including the new Golden Pass LNG facility. Altogether, these new projects will entail capital expenditures net to us in excess of $5 billion and will have the capacity to transport over 5 Bcf a day of natural gas.
To put that capital outlay into context, Kinder Morgan ended 2023 with only $3 billion of capital projects in its backlog. Today, the company has $8.1 billion of expansion projects underway, with in-service dates through the fourth quarter of 2029.
He noted that long-term contracts with creditworthy customers (primarily on the demand side) support all its new projects. These projects also boast investment returns significantly above its cost of capital. "We believe that our investments as they come online will drive growth in EBITDA and EPS for years to come," stated Kinder on the call.
More growth likely
Kinder then turned the call over to CEO Kim Dang, who discussed what the company still sees ahead. She stated,
As we look to the future, we continue to see additional growth opportunities in natural gas between LNG exports to Mexico power and industrial growth. Our internal number for growth in the overall natural gas business is roughly 28 Bcf a day of growth between now and 2030. Our assets are well-positioned to serve this growth. We currently serve approximately 45% of the export LNG demand, 50% of the exports to Mexico, and 45% of the power demand in the combined region of the Desert Southwest, Texas, and the Southeast.
To put that number into context, natural gas demand was 108 Bcf a day in 2023, implying more than 25% growth in demand by the end of the decade. As a leader in transporting gas, Kinder Morgan should capture a significant share of this incremental demand. "We're looking forward to further growth and capitalizing on additional opportunities in 2025," stated Dang on the call.
That growth will come from two sources. The company will likely secure new natural gas infrastructure projects to support its existing network. President Tom Martin stated on the call, "Looking forward, we continue to see significant incremental project opportunities across our natural gas pipeline network to expand our transportation and storage capabilities in support of the growing natural gas market."
In addition, the company has the financial flexibility to pursue acquisitions when the right opportunities arise. Richard Kinder noted on that call that, besides expansion projects, "we are seeing other sizable opportunities to grow our business, as exemplified by our recently announced Outrigger transaction, which will expand our position in the Bakken." The company is spending $640 million to acquire a natural gas gathering and processing system in North Dakota. The acquisition will supply it with incremental income while reducing the capital spending it would have needed to support the growth of its customers in the region. It can now reallocate that capital towards its growing pipeline or larger-scale expansion.
Exciting times
Kinder Morgan couldn't be more excited by its long-term growth prospects. Resurgent demand for natural gas has already enabled the company to add $5 billion of gas pipeline expansion projects to its backlog over the past few months. It's very optimistic that it will secure even more projects and other growth-related investments in the future. These growth drivers should give Kinder Morgan the fuel to grow at an accelerated rate, which could allow it to ramp up its dividend growth rate. That makes it a compelling long-term investment opportunity for those seeking growth and income.
