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When Will Kinder Morgan Raise Dividends?

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KMI’s leverage

Kinder Morgan’s (KMI) net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) ratio in 3Q16 fell to 5.3x, after remaining stable at 5.6x for three fiscal quarters. Though still high, this metric has started moving in the right direction for the company.

The above graph shows KMI’s debt and net debt-to-adjusted EBITDA ratio for the past eight quarters. KMI’s debt at the end of 3Q16 stood at $39,248 million, lower compared to $41.3 billion at the end of 2Q16.

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Long-term target

In the company’s 3Q16 earnings release, Richard D. Kinder, KMI’s Executive Chairman, stated: “During the quarter, we substantially reduced our debt, further positioning Kinder Morgan for long-term value creation. We are ahead of our plan for 2016 year-end leverage and we’re pleased with the progress toward reaching our targeted leverage level of around 5.0 times net debt-to-adjusted EBITDA.”

Kinder added that “this will position us to return substantial value to shareholders through some combination of dividend increases, share repurchases, additional attractive growth projects or further debt reduction.”

Kinder Morgan seems likely to take a step toward increasing dividends only when it moves further close to its targeted net debt-to-adjusted EBITDA ratio of ~5x. This makes the metric a crucial one for investors to monitor in the company’s future quarterly results.

Funding of growth projects

Notably, on funding for future capital projects, Kinder stated: “We remain on track to generate full-year 2016 distributable cash flow in excess of our expected dividends and our expected growth capital expenditures, eliminating our need to access the capital markets to fund growth projects in 2016. Moreover, given our continued efforts to high-grade our backlog, we do not expect to need to access the capital markets to fund our growth projects for the foreseeable future beyond 2016.”

In the next and final part of this series, we’ll check in with analyst estimates for KMI.

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