Now’s The Time To Buy This High-Yield Energy Stock
When the Covid-19 pandemic struck, the world slowly grounded to a halt.
Air travel and vehicle traffic thinned out around the world, and demand for fuel cratered – and so did oil prices. Energy producers have since throttled back on production and slashed their spending budgets.
The Energy Information Administration (EIA) is predicting U.S. crude output to slip to 11.1 million barrels per day next year, a decline of more than a million barrels per day from last year’s peak.
With 83,000 miles of oil, gas, and refined products pipelines and nearly 150 storage terminals, Kinder Morgan (NYSE: KMI) is feeling some headwinds from all of this. Yet, once again, the company is demonstrating the resilience of its fee-based business model.
After stabilizing in the wake of Covid-19 earlier this year, the stock has only recently begun to rebound. Yet it still has a way to go before returning back to its previous levels.
I think that will happen in due course. Here’s why…
Trimming The Fat
Distributable cash flows (DCF) for 2020 are expected to total around $4.53 billion. That’s down about 10% from the original outlook – fairly good under the circumstances. As for 2021, DCF is expected to remain healthy, sliding just 3% to $4.40 billion.
In response, Kinder Morgan has shaved about $680 million off its discretionary expansion project budget for 2021. That still leaves ample room for dividends. In fact, the board has just approved a modest 3% increase in the quarterly distribution to $0.27 per share, or $1.08 per share annually.
I prefer midstream energy companies that live within their means and cover proposed spending plans entirely by internally generated cash flows – without having to borrow money or tap external capital markets. Kinder Morgan is doing just that.
If you take next year’s DCF of $4.4 billion and subtract both dividend distributions ($2.4 billion) and capital expenditure outlays ($0.8 billion), there will be an excess of $1.2 billion left over.
That’s a comfortable cushion.
On a per-share basis, next year’s DCF of $1.95 provides a strong coverage ratio of 180% on the $1.08 dividend. In other words, for every $1.00 distributed, the company will generate $1.80 in cash profits.
As for the surplus, a good chunk will be funneled into share repurchases (a prudent use of capital with the underpriced stock trading at just 7.6 times cash flows). The rest will be directed towards debt repayments to further solidify the balance sheet. I should note that Kinder Morgan has already eliminated $10 billion in debt since late 2015.
Action to Take
Looking ahead, oil consumption is expected to rebound by 1.6 million barrels per day in the U.S. next year and 5.8 billion worldwide. And those forecasts were made before recent vaccine developments. Either way, demand for Kinder Morgan’s network of pipelines and storage terminals will likely climb.
In the meantime, I am more than happy to pocket the well-covered 7.3% yield.
KMI remains a rare opportunity for investors… It’s not too late to get in and enjoy some upside potential while locking in a hefty dividend.
P.S. You don’t have to settle for the paltry yields the average dividend-payer has to offer. You just have to know where to look…
Over at High-Yield Investing, we’re pocketing yields of 7%, 8%, 10%, and even more — without taking unnecessary risks. And our readers are able to build portfolios that can support a secure, worry-free retirement.