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Kinder Morgan Is a Midstream Powerhouse

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This week, I’m answering a reader’s request to analyze another energy infrastructure giant, Kinder Morgan (NYSE: KMI).

Like Enterprise Products Partners (NYSE: EPD), which I covered in last week’s Value Meter, Kinder Morgan is a major player in the midstream space and plays a vital role in keeping the lifeblood of the economy flowing.

But management still sees plenty of growth opportunities on the horizon. The company has over $3.3 billion committed to projects in its backlog, about 79% of which is devoted to lower-carbon investments like renewable natural gas and carbon capture.

As the world transitions to cleaner energy sources, Kinder Morgan appears well positioned to evolve along with it.

And thanks to the company’s huge infrastructure footprint and knack for squeezing value out of the assets it buys, it has been able to continue generating greater shareholder value over time.

For instance, management stated during Kinder Morgan’s first quarter earnings call that the company’s recently acquired South Texas midstream assets are paying off ahead of schedule and already boosting the company’s bottom line.

The way I see it, Kinder Morgan’s long history of successfully optimizing acquired assets provides a measure of downside protection.

And clearly, shareholders agree, as they’ve been driving significant demand for the stock and pushing it to multiyear highs.

Chart: Kinder Morgan (NYSE: KMI)

But is the surge in price warranted?

Let’s walk through our analysis.

Kinder Morgan’s enterprise value-to-net asset value (EV/NAV) ratio is about 2.4. That’s roughly 60% below the average EV/NAV of 6 among firms with similar financial profiles.

This suggests that the market is valuing Kinder Morgan’s cash-generating assets at a significant discount to its peers’. But why?

Based on its net asset value, Kinder Morgan’s cash flow is small compared with the broader market’s. (As I pointed out last week, that’s a common trait among mature midstream companies. But while they may lack explosive growth, they make up for it with their consistency.)

Over the past four quarters, the company’s free cash flow was an average of 3.2% of its net asset value. That’s more than 60% below the average of 8.9% for similar companies, which helps explain the low EV/NAV.

Even so, the company does a great job delivering consistent returns to its shareholders, especially through its dividend payout.

With a current dividend yield of over 6%, Kinder Morgan is very popular among dividend investors. The company has even shown a nice pattern of annual dividend growth, having raised its payout in each of the past seven years.

While Kinder Morgan may not be the most exciting company around, it doesn’t need to be. With an irreplaceable asset footprint, steady cash flows and an attractive yield, this midstream player is doing exactly what it should be doing: reliably delivering results and returning value to shareholders.

In an uncertain market, that kind of dependability is a valuable commodity. Kinder Morgan is a high-quality business that’s trading at a fair price.

The Value Meter rates the stock as “Appropriately Valued.”

The Value Meter

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