Could Buying Kinder Morgan Stock Today Set You Up for Life?

The case for buying stock in gas pipeline company Kinder Morgan (NYSE: KMI) in the near to medium term is powerful, not least because of its 4% dividend yield and sustainable cash flows. Still, should investors commit to the stock strategically for the long term or take a more flexible tactical approach? Here's the lowdown.

Kinder Morgan stock

Kinder Morgan is one of North America's largest energy infrastructure companies and is responsible for transporting 40% of natural gas produced in the U.S. It also transports petroleum products, crude oil, and carbon dioxide and produces renewable natural gas (RNG).

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The key to its earnings is natural gas transmission and storage. For example, 64% of its cash flows come from natural gas, with 88% of that figure coming from transportation and storage on its 82,000 miles of pipelines and 139 terminals.

Energy companies are typically highly cyclical and correlated to energy prices. That said, Kinder Morgan ties its customers into long-term contracts, with 68% of its earnings coming from take-or-pay and hedged contracts (volumes and price are fixed in the contract) and a further 27% on fee-based contracts (price is fixed while volumes are variable), and only 5% on commodity-price contracts.

The relative stability of its earnings and cash flow is essential for long term planning to invest in infrastructure like pipelines. A new pipe requires significant upfront outlays and often requires debt (Kinder Morgan had net debt of $31.5 billion at the end of 2023). Being able to do this and sustain a dividend is a challenge.

As you can see below, the company's free cash flow per share has easily covered its dividend per share in recent years.

KMI Dividend Per Share (TTM) data by YCharts

A shift in sentiment

As outlined above, there's a powerful case for Kinder Morgan offering investors a relatively stable stream of cash flows and dividends, and it's been somewhat strengthened this year by a couple of factors. First is the election of a more pro-energy administration with President Trump seemingly set to encourage fossil fuel production.

The second is a growing realization that renewable energy's cost, complexity, and intermittency will slow the clean energy transition pace to levels below those envisaged by many investors. As such, investors need to upgrade their models and assumptions for long-term cash flows from energy companies and gas volumes transmitted through Kinder Morgan pipelines.

Image source: Getty Images.

A stock to buy for the long term?

Kinder Morgan's management cites research estimating that U.S. gas demand will increase by 19% from 2023 to 2030, with LNG and Mexican exports rising by 92% over the same period. The increase in U.S. natural gas demand forecast implies low-single-digit growth, creating a positive trading environment for a company that has recently invested in acquisitions. In addition, the take-or-pay and fee-based contracts give relative stability so that Kinder Morgan can continue to generate healthy earnings even if energy prices fall.

That said, many things can happen over the long term, and there's no guarantee that the pace of the clean energy transition won't pick up again, not least as it's driven by the acknowledgment that the fuel source for renewables is free. It's hard to predict where future government subsidies will direct investment into clean energy and even harder to predict the technological developments that could reduce the cost of creating, transmitting, or storing renewable energy.

Image source: Getty Images.

Moreover, Kinder Morgan is driven by gas demand. Because customers always negotiate contracts based on demand assumptions, its contracts don't completely protect it from a significant change in market conditions.

Overall, Kinder Morgan is an excellent stock for the near to medium term but not necessarily one to firmly commit to buying for life. Investors' long-term assumptions about its earnings and cash flow will change as sentiment changes about the gas industry.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.