Should You Buy Kinder Morgan Stock After Its Epic 50%+ Rally?
Kinder Morgan (NYSE: KMI) had been in a rut for the past several years. The natural gas pipeline giant’s earnings barely budged as contract expirations offset the benefit of expansion projects. As a result, its stock price had flatlined at around $18 per share since the middle of 2021.
However, that has all changed this year. Kinder Morgan’s stock has skyrocketed, surging more than 50% so far this year, adding about $10 to the share price. Here’s a look at what fueled that rally and whether investors should still buy the pipeline stock.
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Kinder Morgan generated $7.5 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) last year. That was the same level as 2022. It was also on par with 2018’s level after adding back $500 million of earnings from asset sales. In other words, Kinder Morgan’s earnings hadn’t grown for five years. The main culprit was large contract expirations on some major pipeline systems.
However, the company has reached an inflection point this year. It’s on track to produce $8.2 billion in adjusted EBITDA, up 8% from last year. Its contract expiration headwinds are in the rearview mirror. Meanwhile, capacity on its existing pipelines is starting to fill up as demand increases, which is driving higher contract renewal rates. It’s also benefiting from the impact of high-return expansion projects and its $1.8 billion acquisition of STX Midstream last year.
Meanwhile, demand for additional gas pipeline capacity is starting to heat up, fueled by an expected surge in power demand by the end of the decade from AI data centers and other catalysts. Kinder Morgan has already started capturing new expansion opportunities. For example, it’s investing $1.7 billion to expand a gas pipeline to supply growing power and local distribution demand in southeast markets by 2028. This growth resurgence has helped spark a rally in Kinder Morgan’s stock.
With its share price surging, Kinder Morgan’s value proposition isn’t quite as compelling as it once was. The company’s dividend yield has fallen from over 6% to around 4%. Meanwhile, with its stock price over $27 a share, Kinder Morgan now trades at more than 12 times its free cash flow, with $2.26 per share expected in 2024.
However, those are still relatively attractive metrics. The S&P 500 currently offers a dividend yield of 1.2%, which is around its lowest level in 20 years. Meanwhile, the broad market index trades at more than 25 times earnings.
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