Shares of Kinder Morgan (NYSE: KMI) slipped 2.4% in 2023, according to data provided by S&P Global Market Intelligence. While that wasn't a bad performance, it significantly underperformed the S&P 500 (which gained 24.2% in 2023). On a more positive note, Kinder Morgan's total return was a positive 4.1% in 2023 after adding its high-yielding dividend.
Higher interest rates, lower oil prices, and other factors weighed on the natural gas pipeline stock last year. Here's a quick look back at 2023 and what investors can expect in the coming year.
Battling headwinds in 2023
Kinder Morgan expected rising interest rates to be a headwind last year. The pipeline giant provided its 2023 financial guidance in December 2022. At the time, the company anticipated that its distributable cash flow (DCF) would decline from $2.17 per share to $2.13 per share. The culprit was the expectation that higher interest rates would lop $0.15 per share from its DCF last year.
Unfortunately, that wasn't the only headwind it faced last year. While Kinder Morgan hasn't reported its full-year results yet, it warned in its third-quarter earnings report, "We expect to finish 2023 slightly below our plan on a full-year basis." The culprits were "lower than expected commodity prices, delayed RNG projects and higher pipeline integrity expense."
On a positive note, the company capitalized on last year's challenging market conditions to make a needle-moving deal. Higher interest rates forced energy infrastructure operator NextEra Energy Partners to shift its strategy, which included putting its natural gas pipeline assets up for sale. Kinder Morgan was able to capitalize on the situation by acquiring STX Midstream from NextEra Energy Partners for around $1.8 billion. That's about 8.6 times STX Midstream's estimated 2024 earnings before interest, taxes, depreciation, and amortization (EBITDA). Kinder Morgan expects the acquisition multiple to drop to around 7 to 7.5 times over the long term as it integrates the highly complementary pipeline portfolio.
Meanwhile, Kinder Morgan expects 2024 to be a much better year. The company anticipates its DCF will rise by about 5% this year, fueled by rate escalations and recently completed expansion projects. That forecast doesn't include the benefit from the accretive STX Midstream deal, which should enhance its growth rate this year. Kinder Morgan's growing earnings will enable it to increase its dividend again this year (it aims to boost the payout by about 2%, marking its seventh straight year of dividend growth).
Is Kinder Morgan a buy after its lackluster year?
While 2023 was a down year for Kinder Morgan, this year could be much better. Its headwinds should fade, which should enable the company to start increasing its cash flow again (with an additional boost from STX Midstream). With its earnings growing by more than 5% and its dividend yielding over 6%, the company should have the fuel to deliver a double-digit total return in 2024. That makes it look like an attractive buy for those seeking income and some growth.
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Matthew DiLallo has positions in Kinder Morgan and NextEra Energy Partners. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
