Kinder Morgan (NYSE: KMI) announced that the company plans to increase its distribution to an annualized rate of $0.80 per share, starting with the disbursement in mid-February 2016. Living up to this guidance would result in a 60 percent bump from the current annualized run rate of $0.50 per share.
The company also aims to grow its payout by an additional 25 percent in 2019 and 2020, while management highlighted the potential for $2 billion worth of opportunistic stock buybacks. Management pledged to accomplish these goals without issuing debt or equity.
Impressive guidance aside, Kinder Morgan must still refinance $8.333 billion worth of debt maturities between now and the end of 2020—a process that could result in significant cost savings, assuming the credit market remains accommodating.
The four Kinder Morgan bonds that mature next year, for example, have coupon rates ranging from 5.95 to 7.25 percent. By comparison, the midstream giant’s debt maturing in February 2046 yields 4.98 percent to maturity. Fitch Ratings also declared the planned dividend increase “neutral” for the company’s BBB- credit rating.
Although the market reacted positively to Kinder Morgan’s guidance, the stock remains a show-me story that trades at a heavily discounted multiple of about 10 times operating cash flow.
In contrast, midstream bellwether Enterprise Products Partners LP (NYSE: EPD), which boasts a strong balance sheet, integrated asset base and steady distribution growth, trades at about 14.5 times operating cash flow.
This valuation gap reflects the reputational damage incurred when Kinder Morgan slashed its dividend by 75.5 percent in late 2015 to preserve its investment-grade credit rating. Some investors also remain concerned by the company’s elevated leverage ratio—about 5 times operating cash flow—and the viability of its plan to deleverage through growth.
Bottom Line: To earn a higher multiple, Kinder Morgan will need to live up to its guidance and report consistently solid operating results.