Should You Buy Kinder Morgan While It's Below $25?

Shares of Kinder Morgan (NYSE: KMI) have surged over the past year. The natural gas pipeline stock is up nearly 50% in the last 12 months and recently hit its highest level in almost a decade at more than $25 per share.

The pipeline stock has since dipped just under that price point. Here's a look at whether that's a good price to buy shares.

Still an attractive value

Kinder Morgan recently reported its third-quarter results. The natural gas infrastructure company generated $0.49 per share of distributable cash flow (DCF), which was about flat with the year-ago period. That has it on track to produce around $2.26 per share, or about $5 billion, of DCF for the full year, approximately 8% higher than 2023's level.

With the company's stock price recently just below $25 per share, Kinder Morgan trades at 11 times its earnings. That's still extremely cheap compared to the broader market. For example, the S&P 500 trades at more than 25 times earnings while the Nasdaq-100 index sells for more than 32 times earnings. While many companies in those indexes are growing faster than Kinder Morgan, a mid-to-high single-digit growth rate is right in line with the S&P 500's recent average of about 7% compound annual earnings-per-share growth over the past five years.

Kinder Morgan's dirt cheap valuation is the main reason why it has such a high dividend yield. At 4.6%, it's several times higher than the S&P 500's current dividend yield of around 1.3%, putting it among the highest-yielding dividend stocks in the S&P 500. That high-yielding payout is very safe, given its low dividend payout ratio of a little more than 50% of its DCF.

Starting to stomp on the gas

Kinder Morgan's stock trades as if it's not going to grow much, if at all, in the future. However, that couldn't be further from the case. Natural gas demand is strong and growing. The company estimates that catalysts like exports (LNG and Mexican) and rising power and industrial demand in the U.S. will increase consumption by 20 billion cubic feet per day (Bcf/d) by 2030 from last year's level of 108 Bcf/d.

On top of that, AI data centers are emerging as a potentially massive new catalyst for energy demand. Forecasters believe the energy-hungry facilities will drive a surge in U.S. electricity demand, causing it to grow by 2% to 4% annually through 2030. The base case is this will potentially fuel 3-6 Bcf/d of incremental gas demand by 2030, with the upside of more than 10 Bcf/d of additional gas demand.

Kinder Morgan is already starting to capitalize on the acceleration in gas demand. It recently approved a $1.7 billion investment into the South System Expansion 4 Project. The project will add 1.2 Bcf/d of additional gas capacity to the Southeast when it comes online in late 2028 to support growing gas demand in the region. It also approved a $161 million investment to expand the Gulf Coast Express Pipeline. The project will add 570 million cubic feet of additional gas takeaway capacity from the Permian Basin when it enters service in mid-2026. These projects are part of its $5.1 billion commercially secured backlog. Those investments will grow its cash flow as the projects come online over the next several years.

They are only the beginning. Kinder Morgan's co-founder and executive chairman, Richard Kinder, recently stated that he has "never seen a macro environment so rich with opportunities for incremental build-out of natural gas infrastructure." The company's internal growth number is that the industry will build out 25 Bcf/d of projects over the next five years. While it won't capture all those opportunities, it expects to announce several significant projects over the next few months. As they come online, they'll fuel consistent and sustainable earnings growth for the company for years to come.

Still a great buy, especially if you like income

After rallying nearly 50%, Kinder Morgan isn't as cheap as it was at this time last year. However, at less than $25 a share, it's still a pretty compelling buy, given its lower valuation, higher yield, and increasingly robust growth profile. Those factors could give it the fuel to continue producing robust total returns over the next several years.

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Matt DiLallo has positions in Kinder Morgan. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool has a disclosure policy.