Top Energy Stock Poised for Growth: Slow and Steady Wins the Race

Key Points

• Kinder Morgan had a mixed quarter; earnings were better than expected, leaving the company in a robust position to continue reinvesting and paying dividends. 
• Analysts and institutions provide a strong tailwind for the market. 
• The long-term outlook for natural gas demand is lifting the market for KMI stock and will take it to a multi-year high. 

Kinder Morgan NYSE: KMI has what it takes to deliver attractive value to investors. It is a steady energy business supported by rising demand with stable, visible cash flows that allow it to pay a substantial dividend. The payout is worth nearly 5.5% annually and is sustainable, as is annualized dividend distribution growth. The caveat is that the Q2 results have catalyzed the market, share prices are increasing, and the high yield may not last. Analysts and institutions favor this high-yield stock and provide a tailwind that could drive its price to a multi-year high. 

Kinder Morgan Grows As Demand Shifts Gears

2024 is a pivotal year for Kinder Morgan due to a shift in natural gas demand. Natural gas demand resumed growth after stagnating in 2023 and is expected to grow in 2025, albeit at a slow single-digit pace. Sluggishness aside, any growth is good for the fee-based natural gas business, which saw increased demand and contribution from all key segments. The company reported $3.57 billion in net revenue, short of the consensus estimate but up 2% year-over-year and compounded by a solid margin. 

Higher interest payments impacted the margin; however, the impact was minimal and offset by other factors. The more pertinent detail is that distributable cash flow grew compared to last year and is sufficient to sustain balance sheet health and capital returns. The company’s balance sheet is a fortress that allows for self-funding growth, dividend payments, and share repurchases. The dividend is worth nearly 5.5% and compounded by buybacks, which reduced the count by 1% on average in Q2. 

Guidance for the year’s earnings is robust. The company expects net income to grow by 15% and for distributable cash flow to top $5 billion or $2.26 per diluted share. That puts the dividend-to-DCF payout ratio near 50%, which suggests that dividend safety, distribution growth, and reinvestment will continue. The long-term guidance is for sustained natural gas demand growth and growth acceleration as large projects come online this year and over the next two to three years. 

Institutions Push, and Analysts Pull KMI Share Prices Higher

The sell-side support for KMI is notable because it is sufficiently large to assume a moderate degree of conviction, and a significant shift occurred this year. The analysts started issuing upgrades and price target revisions early in 2024, lifting the consensus to Moderate Buy from Hold and the price target by $0.50 to $21.00. The $21.00 consensus price target lags the market but is rising and heading higher due to the revisions; most recent revisions are above consensus. 

This stock's institutional activity has been bullish for years but ramped higher in 2024, with buying activity more than doubling sales. Institutions own about 63% of this stock, creating a strong tailwind for the price action. 

Kinder Morgan Melts Up On the Demand Outlook

As solid as the results are, the demand outlook has KMI shares rocketing higher. Demand is expected to grow by triple digits by 2030, led by exports, electric generation, and decarbonizing efforts to drive KMI business. The increased demand will widen the margin while driving revenue because the company makes money on volume, and most costs are fixed. In this light, capital returns will grow, and distribution growth should accelerate while leaving ample cash flow to reduce leverage and invest in expansion projects. 

Shares of Kinder Morgan are up nearly 4% on the news. The move is compounded by bullish MACD and stochastic signals, suggesting it will continue. The closest target for resistance is near $22.50, aligning with the high end of the analysts' target price range, and may be reached within the next few weeks. The risk for KMI is inflationary; if inflation stays sticky and the FOMC keeps rates higher for longer, the outlook for natural gas demand could become impaired.