Kinder Morgan Reverses Course, Plans 25% Dividend Hikes Annually to 2020

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When energy infrastructure giant Kinder Morgan Inc. (NYSE: KMI) announced in late 2015 that it would cut its dividend by 75% to 50 cents annually from $2.04, the stock tumbled to a five-year low below $15, nearly two-thirds from its five-year high. Late Wednesday the company announced a plan to boost its dividend to $1.25 a share by 2020.

Kinder Morgan Inc. (NYSE: KMI) also reported second-quarter 2017 results after markets closed last night. The midstream giant posted adjusted earnings per share (EPS) of 14 cents on revenue of $3.37 billion. In the same period a year ago, KMI posted EPS of 15 cents a share on revenue of $3.14 billion. Consensus estimates called for EPS of 14 cents and revenue of $3.37 billion for the first quarter.

Kinder Morgan said in a press release that it will pay its current 12.5 cents per-share dividend in August to shareholders of record as of July 31. The company also said it expects to declare an annual dividend of 80 cents per share for 2018.

For Kinder Morgan shareholders, the news just kept getting better. The company anticipates raising its annual dividend to $1 a share in 2019 and to $1.25 in 2020. Kinder Morgan’s board of directors has also approved a $2 billion stock buyback program.

Executive Chairman Richard Kinder said:

We are pleased to fulfill our pledge to return value to shareholders through this combination of an attractive and growing dividend as well as a sizable share repurchase program. In essence, we expect to return substantially all of our operating cash flow in excess of growth capital needs to our shareholders through increasing the dividend and repurchasing shares, while maintaining robust coverage of the dividend.

Chief Executive Officer Steve Kean noted the company’s distributable cash flow (DCF) of 46 cents per share. DCF is a non-GAAP measure that is roughly comparable to net income per share and is the company’s preferred way of comparing basic cash flows to the cash dividends it expects to pay shareholders. Another way of looking at DCF is as coverage in excess of dividends. For the quarter, DCF totaled $1.02 billion.

During the quarter Kinder Morgan completed an initial public offering of its Canadian subsidiary Kinder Morgan Canada that trades on the Toronto Stock Exchange under the ticker symbol KML. Gross proceeds from the IPO were expected to be about $1.3 billion and the lion’s share of the funds are directed to the expansion of the company’s Trans Mountain pipeline to 890,000 barrels a day from its current capacity of 300,000 barrels.

Regarding the outlook for the full fiscal year, Kinder Morgan said it expects to end the year with a net debt-to-adjusted EBITDA ratio of about 5.2 times, growth capital expenditures of $3.1 billion and DCF about 1% below the company’s original estimate.

Analysts have forecast third-quarter EPS at 16 cents on revenue of $3.22 billion. For the full year, the consensus estimates call for EPS of 66 cents and revenue of $13.47 billion.

Shares closed up 0.9% on Wednesday at $19.67 and traded up about 3.4% at $20.34 in Thursday’s premarket session. The stock’s 52-week range is $18.31 to $23.36. The consensus price target on the stock was $24.68 before the earnings announcement.