Energy infrastructure companies often offer investors attractive income streams because long-term fee-based contracts underpin the bulk of their assets. Since they can build additional assets that are also underpinned by long-term fee-based contracts, these entities have a slightly easier time forecasting future dividend growth.
Meanwhile, companies that secure a substantial backlog of expansion projects have the ability to forecast monster dividend-growth potential. Take, for example, Kinder Morgan (NYSE: KMI) and Enbridge (NYSE: ENB), which are on pace to double their already lucrative dividends over the coming years thanks in part to their massive project backlogs. Here's a closer look at how soon these companies could be paying twice their current rate.
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A short wait
U.S. natural gas pipeline giant Kinder Morgan currently yields a solid 2.6%, which is a well-supported level since it is only about a quarter of the distributable cash flow the company generates from its stable fee-bearing assets. At the moment, the company uses its remaining cash flow to finance growth projects and to reduce debt. However, the gas pipeline behemoth has completed several strategic initiatives over the past year that have helped shore up the balance sheet while also securing a portion of the financing needed for future growth projects. Because of that, the company expects to generate more cash than it needs starting next year. As a result, the company recently unveiled a plan to boost its payout 60% next year and by 25% more in both 2019 and 2020; it also authorized a $2 billion share buyback program. At that rate, the company will double its dividend by 2019.
Given that Kinder Morgan currently pays out only a quarter of its cash flow, it can easily support that higher rate (a 100% increase would still consume only about half its cash flow). In addition, Kinder Morgan has several growth projects underway that should bolster its cash flow over the next few years, providing even more support for its dividend-growth plan.
Overall, it has $12.2 billion of projects in its backlog. While the controversial Trans Mountain pipeline expansion under development by its Canadian subsidiary Kinder Morgan Canada Limited (TSX: KML) makes up a significant portion of its backlog, that project doesn't factor into the near-term dividend equation since it won't enter service until the end of 2019 at the earliest. That said, the company has several natural-gas-pipeline, products-pipeline, and terminal projects under construction that should fuel more than $500 million in incremental adjusted earnings before taxes, depreciation, and amortization (EBITDA) over the next three years, giving it further padding for the dividend. In other words, it's a rather safe bet that Kinder Morgan will indeed give investors a 100% raise in the very near future.
Steadily winning the race
Canadian energy infrastructure juggernaut Enbridge currently offers investors an even better starting yield of 4.6%. That payout is on solid ground since it consumes only about half of the company's stable cash flow. Enbridge currently uses the other half of its cash flow, along with outside capital from other sources, to finance high-return growth projects. In fact, the company estimates that it has enough commercially secured expansion projects in its backlog to support 10% to 12% annual dividend growth through 2024 while maintaining a 50% to 60% payout ratio. If Enbridge can hit the high end of that range, it would be on pace to double the dividend by 2024.
It's worth pointing out, however, that Enbridge's dividend-growth forecast carries more risk than Kinder Morgan's plan, because it needs to complete a significant percentage of the projects in its backlog to give it the cash flow necessary to support that higher payout level. The company is off to a solid start: It has 31 billion Canadian dollars' ($25.6 billion) worth of projects underway that provide good earnings and dividend-growth visibility through 2020. However, it needs to move forward with a considerable portion of the nearly CA$48 billion ($39.6 billion) of commercially secured longer-term projects further down the pipeline to cover the rest of the projected payout. If it doesn't complete enough projects, it might not deliver the high-end growth needed to double its dividend by 2024. Notably, though, Enbridge has an ample supply of projects focused on cleaner energy sources such as natural gas and wind, which increases the likelihood that it can achieve the high-end rate needed to double its already attractive payout within seven years.
Two ways to collect a high-growth income stream
Kinder Morgan and Enbridge each offer investors an attractive current income stream that appears poised to double in the years ahead. That said, investors have an interesting choice. They can accept less income now with a high probability that the payout will double in just two years, by going with Kinder Morgan. Or they could opt for more cash flow in the near term with the potential to collect twice that rate several years from now, by choosing Enbridge. While either option looks like a winner, it's worth noting that Kinder Morgan's stock price is dirt cheap right now, which opens up the possibility of equally compelling capital gains as the company makes good on its promised dividend growth.
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Matthew DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Enbridge and Kinder Morgan. The Motley Fool has a disclosure policy.