This Could Spark a Dividend Hike at Kinder Morgan Inc

Kinder Morgan Inc

Income investors were unimpressed when Kinder Morgan Inc (NYSE:KMI) cut its dividends last December. But now, there is a new deal that could boost the pipeline giant’s ability to restore its dividends.

On Sunday, July 10, Kinder Morgan announced that it is selling a 50% stake in its southern natural gas (SNG) pipeline system to Southern Co (NYSE:SO) for $1.47 billion. After this deal, Kinder Morgan will continue to operate the 7,600-mile pipeline system. (Source: “Southern Company, Kinder Morgan Enter Southern Natural Gas Pipeline Strategic Venture,” Kinder Morgan Inc, July 10, 2016.)

“We plan to use all of the proceeds from this transaction to reduce debt at KMI,” said Steve Kean, president and chief executive officer of Kinder Morgan. “This is another step towards achieving our stated goals of strengthening our balance sheet and positioning the company for long-term value creation.” (Source: Ibid.)

This is a welcoming move to Kinder Morgan investors. On the following trading session, Kinder Morgan shares climbed 3.67%. During a conference call on Monday, Kinder Morgan’s chief financial officer, Kimberly Dang, said that by reducing its debt load, Kinder Morgan could free up some cash that could be used to reward investors. (Source: “Kinder Eyes Return to Dividend Growth After Southern Deal,” Bloomberg, July 11, 2016.)

This transaction could also allow Kinder Morgan to restore its payout. Last December, Kinder Morgan reduced its quarterly dividend by 75% from $0.51 a share to $0.125. At that time, the company faced a choice between using its cash for growth and funding the dividend.

Will Kinder Morgan raise its dividend? According to Dang, it will depend on the company’s debt-to-EBITDA ratio (earnings before interest, taxes, depreciation, and amortization). The current ratio is expected to fall to 5.3 by the end of this year, below its previous target of 5.5. Dang said that if the ratio can get as low as five or less, it could trigger a dividend hike or buybacks.

If Kinder Morgan manages to restore its dividends, it might also help investors’ confidence in the stock.

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