Will Kinder Morgan Raise Its Dividend in 2017?

By Chuck Saletta Markets Fool.com

Image Source: Getty Images.

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Energy pipeline giant Kinder Morgan (NYSE: KMI) had a rough ending to 2015 that carried over into early 2016, as it was forced to cut its dividend to maintain its investment grade debt rating. As its stock had been prized by income investors for its history of dividend payments and increases, that cut stung, hard. Still, as that cut was designed to shore up its balance sheet and enable future dividend increases, it's only fair to wonder whether Kinder Morgan will raise its dividend in 2017.

Unfortunately, that's very unlikely. In early December, Kinder Morgan released its 2017 financial expectations, and indicated that it expects to declare dividends of $0.50 per share in 2017. That would only match its 2016 dividend level.

There's hope for a return to rising dividends in 2018

Despite the fact that Kinder Morgan isn't expected to increase its dividend in 2017, it appears on track to potentially resume its usual hikes as early as 2018. For instance, it's forecasting a balance sheet leverage ratio of 5.4 by the end of 2017, safely below the 5.8 that Moody's would consider stable and the 5.9 that got it in trouble in late 2015.

In addition, Kinder Morgan had this to say in its early December financial expectations release:

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As its backlog of projects continues to be placed in service, the company expects to generate cash flow in excess of its investment needs. KMI currently believes the best way to maximize shareholder value will be to use a significant portion of that excess cash to increase its dividend.... KMI also expects to provide guidance on a revised dividend policy in the latter part of 2017, with a view toward delivering additional value to its shareholders in 2018.

Or in other words, the company can't currently promise it will increase its dividend in 2018, but it's doing what it can to set itself up to be able to do so, and it will let us know if that's working before the end of 2017.

Kinder Morgan remains a cash generating machine

Even prior to the advent of its debt-driven woes, Kinder Morgan generated billions of dollars of cash from its operations each year. It served -- and continues to serve -- as something of an energy tollbooth operation, making money by shipping energy from where it's produced to where it's needed. Around 97% of its 2016 cash flow came from fee-based or hedged operations, meaning it has very little direct exposure to commodity prices, but a lot of exposure to the volume of energy it moves.

Perhaps most encouragingly, Kinder Morgan continues to grow, despite having its debt-based financing plans derailed. The company invested an estimated $2.7 billion in expansion projects in 2016, with the capital for those projects provided by its existing cash flows. That's a much more sustainable way to grow than via increasing debt loads, and it provides decent hope that Kinder Morgan should be able to resume increasing its dividends in 2018, even if interest rates rise.

Patience should pay off for investors

Investors buying Kinder Morgan today will receive a decent, though not stellar, current yield of around 2.4% on their investment. With the company expected to generate enough cash in 2017 to continue both shoring up its balance sheet and paying for expansion projects, it is setting itself up to be able to resume dividend increases in 2018.

While there are no guarantees in investing, patient investors willing to own its shares are being offered a reasonable price for a solid company with real potential to increase shareholder rewards in 2018. A 2017 dividend hike may not be in the cards for Kinder Morgan, but investors can still look forward to a strong likelihood of bigger dividends to come.

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Chuck Saletta owns shares of Kinder Morgan and has the following options positions on the company: Synthetic Long, Jan 2018 @ $17.50 and Short Strangle, Jan 2017 @$20/$24. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.