Kinder Morgan's $640 Million Acquisition Gives It More Fuel to Grow Its 4%-Yielding Dividend

Kinder Morgan's (NYSE: KMI) main growth drivers in recent years have been its organic expansion projects. The natural gas pipeline giant has completed billions of dollars in projects and has more in the works. They've helped give it the fuel to increase its 4%-yielding dividend, which management has hiked for seven straight years.

However, acquisitions have always been part of the company's growth story. It recently unveiled its latest deal, which will supply it with some incremental cash flow this year. That will enhance the pipeline operator's ability to sustain and grow its dividend in the future.

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Drilling down into the deal

Kinder Morgan is buying a natural gas gathering and processing system in North Dakota for $640 million. The deal includes a 270 million cubic feet per day processing plant and a 104-mile gas-gathering pipeline system with 350 million cubic feet per day of capacity. This system, backed by long-term contracts with major customers, connects natural gas sources in the Williston Basin to high-demand markets.

The pipeline company expects the acquisition will be immediately accretive to its earnings. It's paying about 8 times expected 2025 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the system. That value doesn't include about $20 million of cash payments it will collect this year that receive deferred revenue recognition. The company plans to fund the transaction with cash on hand and short-term borrowing.

The acquisition is an excellent strategic fit. Kinder Morgan plans to integrate this highly complementary system into its existing Hiland natural gas assets. The deal will enable the company to efficiently expand its footprint and provide incremental services to support the growth of its customers' production in the region. It will also allow the company to reduce its capital spending in the region, freeing up funds for other expansion projects.

Ample capacity to continue growing

Kinder Morgan expects to close this acquisition in the first quarter. Because of that, it will add to what should be a strong year for the pipeline company. Management's initial expectations are that it will deliver $8.3 billion of adjusted EBITDA this year (up 4% from last year's forecast) and $1.27 per share of adjusted earnings (an 8% increase from 2024's guidance). That growth supports the company's plans to increase its dividend for the eighth year in a row.

The company can easily fund the acquisition with its strong balance sheet. Prior to the deal, Kinder Morgan expected to end 2025 with a leverage ratio of 3.8, which would have been in the lower half of its 3.5 to 4.5 target range. CEO Kim Dang noted late last year that this conservative leverage level "provides good capacity for additional opportunistic investment." It will still have plenty of capacity for additional investments after closing this $640 million acquisition.

The company has also been using its financial flexibility to sanction new capital projects. For example, it approved the $1.4 billion MSX Project last month, which will add 1.5 billion cubic feet per day of gas capacity to markets in the Southeast when it comes online in late 2028. It previously approved a $1.7 billion investment in another natural gas pipeline project in the Southeast with a similar expected in-service date. Dang stated in the press release unveiling MSX that "we expect to announce additional projects in the coming months."

Kinder Morgan sees rich opportunities to invest in additional natural gas infrastructure in the coming years. Demand for natural gas is growing due to rising exports to Mexico, as well as to other overseas markets in the form of liquefied natural gas (LNG), and emerging growth catalysts in the U.S. like the onshoring of manufacturing and the construction of AI data centers. Securing additional projects would enhance and extend the company's growth profile, giving it additional fuel to increase its dividend in the future.

Add that potential for growth to Kinder Morgan's already high-yielding payout, and it's clear that this is an attractive investment opportunity for those seeking stable income streams that are set up to rise in the future.

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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.