Kinder Morgan High Yield: Buy, Sell or Hold?

Most investors will probably find Kinder Morganhis (NYSE: KMI) The 5.5% dividend yield is the company’s most attractive investment attribute. This is especially true given the meager 1.2% available from S&P 500 and the average yield of 3.2% for the energy industry.

But don’t start and stop with Kinder Morgan’s yield. There is a lot to think about when making the decision to buy, sell or hold.

Do I Buy Kinder Morgan Stock?

Starting with the good stuff up front, Kinder Morgan is one of the largest midstream companies in North America. Its portfolio of vital energy infrastructure — including pipelines, storage and transmission assets, among others — would be virtually impossible to replace or replace.

The vast majority of the company’s assets produce reliable, contractually determined cash flows. While energy prices are important, Kinder Morgan’s business tends to be much less volatile than that of an energy producer or refiner.

There is a solid business case to support the dividend. Notably, the company’s distributable cash flow covers its distribution at a hefty 1.7 times. In addition, Kinder Morgan boasts an investment-grade balance sheet. Overall, the dividend appears to be on solid ground.

Looking ahead, Kinder Morgan has $5.2 billion in capital investment projects that should help boost earnings. In 2024, it projects earnings growth of 14%, with distributable cash flow growth of 8%. That’s not a bad story if you’re looking for a dividend stock.

Do you own Kinder Morgan stock?

If you own Kinder Morgan, the reason you’re buying it is basically the same reason you’d want to own it. That said, there is one small wrinkle.

The stock remains well below its peak in 2015. This is an important time for the company, as Kinder Morgan cut its dividend by 75% during that time. If you’ve owned it since then, you’re probably still underwater.

Right now, it doesn’t look like you’re going to break even anytime soon. Why? Because the dividend is up just 2% year over year.

That’s pretty anemic dividend growth for a company that expects distributable cash flow growth of 8%. If you’re on losses that you can capture to offset gains elsewhere in your portfolio, you might want to consider selling Kinder Morgan for portfolio reasons.

Are you selling Kinder Morgan stock?

That dividend cut should stick in the mind, as it was a shocking development. Why? Because just months before the downgrade, management told investors to expect up to 10% growth.

The story continues

To be fair, 2016 was a difficult year for the energy sector, so it was probably the right call to cut the dividend. Or at least it was the right call for Kinder Morgan.

But there is a problem with the top 2% growth as well. That’s because by the start of the decade, Kinder Morgan had established a huge dividend growth plan. The goal was very clearly to rebuild confidence on Wall Street.

The plan was to culminate in 2020 with a dividend increase to $1.25 per share. But the pandemic struck, and management withdrew that plan (again, probably the right move for the company), telling investors it would still reach $1.25, but at a slower pace.

The most recent annual dividend is $1.15 per share. So four years later, Kinder Morgan still hasn’t delivered on the bold dividend promise it made.

The biggest takeaway here is that it wouldn’t be shocking if you looked at these events and wondered if you could trust management. If trust is important to you, then you should probably sell Kinder Morgan or simply not buy it in the first place. There are other midstream options such as Enterprise product partnerswith higher returns and better histories of delivering on their promises. For reference, Enterprise has increased its distribution for 26 consecutive years.

What to do with Kinder Morgan?

Wall Street is forward-looking, so it would be understandable if investors were buying Kinder Morgan’s high yield and its growth expectations. However, for conservative, long-term income investors, you can’t just look to the future because a company’s past tells a lot about how it’s performing.

In the case of Kinder Morgan, it appears that income-minded shareholders have borne the brunt of the pain when things don’t go as planned with the business. This will likely turn off more than a few potential investors (and maybe even some current shareholders).

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

Kinder Morgan High Yield: Buy, Sell or Hold? was originally published by The Motley Fool