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Kinder Morgan: A Solid Dividend Stock for 2015

Charles Sizemore
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Here’s a headline that would make even the most dedicated energy bull pause: “US Running Out of Room to Store Oil.”

Yikes. For the past seven weeks, Americans have been producing and importing about a million more barrels per day than they’ve been consuming, with the surplus filling up storage tanks in Oklahoma. We’re practically swimming in oil…and while new exploration has ground to a halt, current production is still actually rising for the time being.

This is a long way of saying that we won’t be seeing crude oil priced at $100 per barrel again any time soon. But while this is a disaster that threatens to ruin many of the speculative explorers and producers, it’s a once-in-a-generation opportunity for the stronger infrastructure players to buy assets on the cheap.

As a case in point, I bring you pipeline operator Kinder Morgan (KMI), which has been on a shopping spree of late. Kinder Morgan happens to be one of my very favorite dividend stocks, and I expect it to continue paying—and raising—its dividends for years to come, regardless of the direction the price of crude oil takes.

Kinder Morgan is the largest energy infrastructure company in North America with about 80,000 miles of pipelines in operation. About 85% of its cash flows are fee based, meaning they have virtually no exposure to falling energy prices, and most of the remaining 15% of cash flows are hedged.

Founder and Chairman Richard Kinder did a major reorganization of his empire last year, rolling popular MLP Kinder Morgan Energy Partners and sister security Kinder Morgan Management into the parent, Kinder Morgan Inc. His goal was strengthen the balance sheet, lower the cost of capital, and put investors in position to see much higher dividends. His timing couldn’t have been better.

Earlier this year, Kinder Morgan bought $3 billion in pipeline assets from a cash-strapped Harold Hamm (yes, the guy who wrote a check for $975 million to settle his divorce). Hamm’s biggest company—Continental Resources (CLR)—is a fine example of what not to look for in an energy company, by the way. It’s highly leveraged, and a falling oil price is devastating to its profitability.

Let’s dig into Kinder Morgan’s dividends. Since initiating its dividend in 2001, Kinder Morgan has more than tripled its quarterly dividend. And in the last year, its dividend is up a cool 10%.

Expect a lot more of the same going forward. When Kinder Morgan announced its business reorganization last year, management wrote that it expected to see dividend growth of at least 10% per year through 2020.

Buying Kinder Morgan today, you get to enjoy a 4.4% current dividend. But let’s now assume that hold the stock through 2020 and that management’s estimates are correct. Assuming five years of 10% dividend growth compounded annually, you’d be looking at 61% cumulative dividend growth. That would give you a yield on cost of 7.0% five years from now. And that assumes the minimum 10% annual growth; if Kinder Morgan continues to pick up assets from distressed sellers, the real growth rate might be significantly higher.

One final thing to consider on Kinder Morgan stock: When we buy KMI, we’re investing alongside the people running the company. They have serious skin in the game. Since last February, company insiders have bought a net 812,599 shares worth over $33 million at today’s prices. And Richard Kinder himself earns no compensation other than the dividends he collects on his shares. So Mr. Kinder has every incentive to continue raising Kinder Morgan’s dividend for the benefit of us all.

Disclosure: Long KMI

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

This article first appeared on Sizemore Insights as Kinder Morgan: A Solid Dividend Stock for 2015

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