A high dividend yield often indicates that a company’s growth days are in the rearview mirror. Without a lot of attractive investment opportunities, these companies return a significant percentage of their cash flow to investors by paying dividends.
That used to describe Kinder Morgan (KMI -1.03%). However, the narrative surrounding the high-yielding natural gas pipeline giant has dramatically changed over the past year. It expects natural gas demand to surge by 2030, which should fuel high-octane earnings growth in the coming years. It currently yields 4.3%, but it could also have the fuel to produce strong total returns.
The coming gas surge
Natural gas industry experts predict that demand will surge over the coming years. Analysts at Wood Mackenzie anticipate that natural gas demand will increase by 20 billion cubic feet per day (Bcf/d) by 2030 from last year’s level of 110 Bcf/d. Several factors fuel that view, including growing export demand for liquefied natural gas and to Mexico, rising power demand, and expanding industrial, commercial, and residential demand.
Kinder Morgan is even more bullish. It projects that gas demand will increase by 28 Bcf/d by 2030, driven primarily by a much more optimistic view of power demand. The company sees catalysts like coal-to-gas conversions, industrial reshoring, renewable energy backup power, and data center demand driving significantly more incremental gas demand than Wood Mackenzie and others currently forecast.
One factor fueling its more optimistic view is what it’s seeing from customers. Kinder Morgan operates the country’s largest natural gas transmission network. It moves 40% of all the gas produced and controls 15% of the natural gas storage capacity, and customers are coming to it to help them meet their power needs, which are far greater than most current gas projections.
Stomping on the gas
Kinder Morgan is already starting to capitalize on the surge in gas demand. Over the past few months, it has secured enough commercial contracts with customers to approve about $5 billion in new large-scale natural gas pipeline projects. As a result, the company now has about $8.1 billion of total expansion projects in its backlog, $7.2 billion of it related to natural gas. That’s a 60% increase from the $5.1 billion of projects in its backlog at the end of the third quarter. It’s even higher from the end of 2023, when it had $3 billion worth of projects, and 2021, when it had only $1.4 billion of projects.
South System Expansion 4 (SSE4), Trident, and Mississippi Crossing, the company’s three large-scale natural gas pipeline projects, will each cost more than $1.6 billion. They’ll have capacities ranging from 1.2 Bcf/d at SSE4 to 2.1 Bcf/d at Mississippi Crossing, and they’ll have in-service dates running from the first quarter of 2027, for Trident, through the end of 2029, for SSE4. They will help fuel significant earnings growth for the company in the back half of this decade.
These projects are only the beginning. Kinder Morgan is currently pursuing more than 5 Bcf/d of additional natural gas capacity projects related to power demand alone. That demand growth will drive more capacity expansion opportunities downstream to gather and process natural gas from newly drilled wells and transport it out of the production basins.
Kinder Morgan’s growing list of projects should fuel accelerated earnings growth in the coming years. The company currently expects to increase its adjusted earnings per share by more than 10% this year, driven in part by the $1.2 billion of projects it placed into service last year and the $2.1 billion it’s on track to finish in 2025. The pace of the company’s project completions is on track to accelerate in the coming years as it finishes those three major gas pipeline expansions and other projects it will undoubtedly approve in the future.
The company’s surging earnings should give it the power to continue increasing its high-yielding dividend. Kinder Morgan expects to provide its investors a modest 2% raise this year, marking its eighth straight year of dividend growth. Its dividend growth rate could be much higher in the future as it cashes in on surging gas demand.
A high-yielding, high-octane growth stock
Kinder Morgan is about to hit a growth spurt. The natural gas pipeline giant is capitalizing on growing gas demand, which is providing it with lots of opportunities to expand its leading natural gas infrastructure position. Those projects should fuel a surge in its cash flow, giving the company more money to pay dividends. That combination of a high-yielding income stream and high-octane earnings growth could give Kinder Morgan the power to produce robust total returns in the coming years. It looks like a compelling stock to buy and hold for the long haul.
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