Kinder Morgan (NYSE: KMI) was full of surprises this past quarter. On the positive side, its financial results unexpectedly came in ahead of expectations. However, the company also unveiled an unwelcome setback in the form of an additional three-month delay in the projected in-service date of its Trans Mountain Pipeline expansion project in Canada. Out of everything Kinder Morgan reported last quarter, that delay took investors' focus and was the reason shares slipped a bit last week.
That said, by putting all its attention on that piece of disappointing news, the market completely missed that Kinder Morgan surprisingly returned more cash to investors than initially planned by starting its stock repurchase program a month early. It's a decision that could enable the company to grow a little bit faster than expected this year.
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Passing the savings on to investors
Entering 2017, Kinder Morgan anticipated that it would produce $4.46 billion, or $1.99 per share, of distributable cash flow (DCF), which it would use to finance $3.2 billion of expansion projects and pay roughly $1.12 billion in dividends, with about $96 million to spare. However, despite a $40 million impact from Hurricane Harvey and the additional costs related to its IPO of Kinder Morgan Canada (TSX: KML), full-year results came in $26 million, or $0.01 per share, ahead of expectations. That incremental excess cash flow, plus some cost savings from lower-than-expected maintenance expenses, means it generated $380 million in extra money last year.
The company chose to use $250 million of that cash to start its stock repurchase program early, by buying back 14 million shares in December. While that might not seem like much, it allowed a return of about $1.37 billion in cash to investors last year via dividends and repurchases, or 22% more than initially anticipated. Those incremental repurchases, when combined with what's potentially coming down the pipeline, could help Kinder Morgan outperform its guidance again this year as well.
Pulling the plan forward without borrowing from the future
Because Kinder Morgan paid for December's share repurchases with excess cash generated in 2017, it didn't eat into its money for this year, when it expects to grow DCF to $4.57 billion, or $2.05 per share. The company earmarked $2.2 billion of that for expansion projects and $1.8 billion for the dividend, which will be 60% higher than last year. That leaves it with an estimated $568 million in excess cash that it could use to finance additional growth projects, pay down more debt, or buy back additional shares as part of its $2 billion authorization.
In other words, even after spending $250 million on buybacks in December, the company still has the money to potentially repurchase another $500 million in shares this year, boosting its total buyback capacity up to as much as $750 million by the end of this year. That might not sound like a lot, but at its current market cap, it could repurchase up to 1.8% of its stock by year-end as opposed to just 1.1%. That could boost DCF by as much as $0.04 per share this year, assuming it bought back that entire amount early in 2018 at around the current share price, which would accelerate its growth rate from 2.5% to 4.5% in 2018.
Don't overlook the impact of the repurchases
Because the added Trans Mountain delay cast a shadow over Kinder Morgan's fourth-quarter results, it caused most investors to miss the fact that the company returned more cash to them last year than expected. That early start to the share repurchase program puts it on pace to buy back an even more meaningful amount of its shares this year, which could enable it to grow earnings faster than expected. It's another proof that Kinder Morgan's plan to use its massive cash flow to create value for investors is slowly working, even if the market hasn't noticed just yet.
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Matthew DiLallo owns shares of Kinder Morgan and has the following options: short March 2018 $17 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
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