Kinder Morgan: Strong Yield And Free Cash Flow Amid Energy Sector Troubles (NYSE:KMI)

US investors have to dig and claw to find quality high-yield names. Goldman Sachs reports that the current dividend yield on the S&P 500 is a scant 1.45% as of late February 2024. It could be a sign that the market is getting pricey, though the beaten-down Energy sector trades at a very low forward earnings multiple today. If you do some globe-trotting, though, you will find much higher yields. For investors wishing to boost their domestic portfolio’s income rate, then analyzing oil and gas storage and transportation industry companies could be a useful approach.

I have a buy rating on Kinder Morgan, Inc. (NYSE:KMI). I see shares as undervalued, while a downtrend on the chart has halted. With a high free cash flow yield and improved profitability in the offing, the stock appears favorable in today’s environment.

Yield Is Harder to Come By in the USA

According to Bank of America Global Research, KMI is one of the largest energy midstream companies with diverse operations across the midstream energy value chain. Businesses include natural gas pipelines, liquids terminalling, CO2 production, as well as products pipelines.

Back in January, KMI missed EPS estimates while also reporting a soft revenue number. Shares traded lower post-earnings but fell just 1.4%. Looking forward, according to data from Option Research & Technology Services (ORATS), the options market has priced in a notable 4.0% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the April 17 report. There have been more upward EPS revisions by sell-side analysts in recent months compared to downgrades, which is an encouraging sign.

KMI: YoY EPS Growth Expected For Q1, Positive EPS Revisions

On valuation, analysts at BofA see earnings rising at a double-digit percentage pace this year after two years of negative per-share profit growth. EPS is then expected to inch toward $1.30 by the out year. Seeking Alpha’s consensus numbers show a similar growth trajectory, with a further acceleration in operating EPS in 2026. Revenues are seen rising sharply this year, with just a 4% top-line increase in 2025.

Dividends, meanwhile, are expected to rise at a slow rate over the coming quarters, potentially leading to an even higher yield if the trend of sideways share-price action persists. With significantly positive free cash flow and a mid-teens earnings multiple, there’s a lot to like from a valuation perspective.

Kinder Morgan: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts

If we assume $1.20 of operating EPS over the next 12 months and apply the stock’s 5-year average P/E of 16.6, then shares should be priced near $20, making KMI to the cheap side by a bit more than 10%. Considering its muted volatility and high yield, which is a good-enough discount to warrant a buy rating. Moreover, the dividend yield, currently at 6.55%, is above its 5-year average of 6.09% at a time when the S&P 500’s dividend payout rate hovers near all-time lows.

KMI: Modest Valuations Relative to Its History, High Yield

Compared to its peers, KMI features mixed quant rankings. Its valuation is roughly on par with other oil and gas transportation and storage firms, while its growth trajectory has been likewise comparably weak in the last handful of quarters. Profitability trends are positive, however, with notable strength in free cash flow generation per share. EPS revisions have been decidedly positive, though share-price momentum has been lackluster. I will detail key price levels to monitor on the chart later in the article.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon shows an unconfirmed Q1 2024 earnings date of Wednesday, April 17 AMC. No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

With improved growth prospects and a solid valuation, KMI’s chart is unimpressive, but less bearish than what was seen a year ago. Notice in the chart below that shares were stuck in a modest downtrend after touching a peak just above the $20 mark during the oil and gas run-up in the first half of 2022. While the company does not rely on sustained high energy prices, broader trends in the Energy sector can certainly impact the stock.

Today, a trading range has emerged, with key resistance just above $18 and support near $16. Based on this slightly more than $2 zone, should a bullish breakout occur, it would portend an upside measured move price objective to just above those 2022 highs based on the height of the current trading range. But should a bearish breakdown take place, then a downside target of $13 could be in play. Still, considering the high amount of volume by price in the $16 to $18 range, this could be a persistent area for some time. Moreover, a bearish divergence between price and the RSI momentum oscillator at the top of the chart underscores the somewhat soft absolute price action and quite weak relative strength to the overall market. Finally, trendless action is evidenced further by a flat long-term 200-day moving average.

Overall, KMI’s chart reveals a flat trend, but that’s an improvement from a modest downward trend seen over the back half of 2022 and much of last year.

KMI: A Trading Range Has Emerged, Key Support at $16

The Bottom Line

I have a buy rating on KMI. While the momentum situation is soft, its valuation is attractive with both top-line and EPS growth ahead, while the dividend yield is historically high.