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A Popular 6% Yielder With Deteriorating Dividend Safety

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In September 2021, I looked at the dividend safety of energy distributor Kinder Morgan (NYSE: KMI). At the time, I gave it a “C” rating, which indicates moderate risk. Kinder Morgan’s issues were a dividend cut in the past 10 years and high debt.

Today, the situation is getting worse.

The dividend cut, which happened 6 1/2 years ago, is still a black mark on Kinder Morgan’s record. The current $0.2775 per share quarterly dividend is still 45% below where the dividend was before the reduction in October 2015.

Chart: Kinder Morgan's Dividend
Another issue is debt. Kinder Morgan piles it on like a member of Congress during an election year.

In September 2021, Kinder Morgan had more than $30 billion in debt. Its debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio was 6. That’s way too high. I don’t want to see anything above 4, and preferably lower.

Today, Kinder Morgan’s debt is above $31 billion and its debt-to-EBITDA ratio has climbed to 7.7 (though the company plans to reduce that ratio to 4.3 in 2022).

But there’s more bad news. Distributable cash flow (DCF), the measure of cash flow we use to determine whether the dividend is safe, is forecast to decline from $5.5 billion in 2021 to $4.9 billion in 2022. The $4.9 billion should still easily cover the projected $2.5 billion in dividends being paid out this year. But we never want to see cash flow decreasing. If it’s the beginning of a trend, it can put the payout in jeopardy down the road.

The cash flow decline is not a major concern on its own at this point. But that issue, combined with a heavy debt load and a history of lowering the dividend, means that I wouldn’t be surprised at all if Kinder Morgan cut its dividend in the next year or so.

Dividend Safety Rating: D

Dividend Grade Guide
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Good investing,

Marc

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