Yesterday the Canadian government announced that it will buy the Trans Mountain Pipeline from Kinder Morgan Canada for CAD$ 4.5 billion. Kinder Morgan (KMI), a member of my Dividend Portfolio, owns a 70% stake in Kinder Morgan Canada.
The sale, which certainly isn’t popular with opponents of the project who see it as a effort to end-run environmental, economic, and cultural objections, by the government, gets Kinder Morgan out from under a long-running, bitter, and by no means concluded court fight. Wall Street analysts were giving only 50% odds that the pipeline would get built.
The purchase price will put $2 billion in cash on the company’s books after taxes. Kinder Morgan Canada, which had become a cash sink while this project dragged on and on, will now start to generate cash for Kinder Morgan.
The sale removes one big issue hanging over Kinder Morgan’s stock, and leaves the company with a relatively easier to solve problem. The Trans Mountain Pipeline with its projected $5.7 billion budget, represented about half of Kinder Morgan’s total capital investment budget for the next five years. To grow, Kinder Morgan will have to find replacement investments with good profit margins. With continued growth in the U.S. and Canadian oil sands industry, and the pressing need to solve the bottleneck in the Permian Basin, I don’t think Kinder Morgan’s very experienced management will have too much trouble finding those projects.
One short-term term alternative open to Kinder Morgan is to use some of this cash to boost returns to shareholders either through a dividend increase or by expanding its $2 billion authorized stock buyback. The company looks on track to raise the current 80 cents a share dividend to $1 in 2019 and $1.25 in 2020.
At the current dividend of 80 cents a share, Kinder Morgan yields 5.01%. The shares are down 6.76% since I added them to my Dividend Portfolio on February 24, 2016. I don’t put target prices on stocks in the Dividend Portfolio, but I’d estimate that Kinder Morgan shares are about 15% undervalued after today’s close at $16.56 a share.