In 2024, Kinder Morgan outperformed the S&P 500 significantly. Does this high-yielding pipeline company have the potential to generate substantial overall returns once more in 2025?
In 2024, Kinder Morgan outperformed the S&P 500 significantly. Does this high-yielding pipeline company have the potential to generate substantial overall returns once more in 2025?
Shares of Kinder Morgan (KMI dropping 0.61%) saw a breakout in 2024. This natural gas pipeline giant had surged more than 50% leading up to the final trading days of the year. The increase, coupled with its high-yielding dividend (currently surpassing 4% following the rally), resulted in a total return exceeding 60%. This significantly outperformed the S&P 500 index, which delivered a total return approaching 30%.
Let's delve into what spurred the pipeline giant's outstanding rally in 2024 and whether it has the necessary momentum to outshine in 2025.
Accelerating in 2024
Kinder Morgan had been experiencing a lull in recent years. In 2023, the pipeline titan generated $7.5 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). This figure was consistent with 2018, after accounting for the impact of asset sales.
However, the company stepped on the gas in 2024. It is projected to increase its adjusted EBITDA by around 5% for the year. Simultaneously, Kinder Morgan anticipates its adjusted earnings per share to increase by approximately 9% in 2024. The pipeline company is benefiting from waning headwinds from asset sales and large contract rollovers, as well as the influence of recent investment in expansion-related projects, such as the acquisition of STX Midstream at the end of last year.
Furthermore, the company's long-term growth prospects have seen a significant improvement. It has recently added a couple of substantial natural gas pipeline projects to its pipeline, with both projects set to commence operation in 2028. Additionally, it has incorporated a few smaller projects set to begin commercial service in the imminent future. These projects have significantly enhanced and prolonged its growth perspective.
These growth catalysts have contributed to the surge in Kinder Morgan's share price. Investors now believe in the company's capacity for strong growth in the coming years, which is driving up the stock's valuation.
Prospects for 2025 and beyond
Kinder Morgan expects its earnings to continue rising in 2025. The company projects generating approximately $8.3 billion in adjusted EBITDA next year, an increase of around 4% compared to its 2024 total. Meanwhile, it anticipates that its adjusted earnings will rise by approximately 8% to around $1.27 per share in 2025, making it possible to continuously increase its dividend (2025 will mark the eighth consecutive year of dividend growth).
The company also expects to continue enhancing its long-term growth profile in 2025. CEO Kim Dang recently stated, "We expect to announce additional projects in the coming months." It is already in the final stages of discussions with customers on an additional expansion of one of its recently approved pipeline projects.
The company sees a generous opportunity to expand its natural gas pipeline network in the coming years. U.S. natural gas demand is projected to increase by 19% to 128 billion cubic feet per day (Bcf/d) by 2030. Rising industrial demand, natural gas exports (to Mexico and LNG), and other stimuli will drive this growth.
Meanwhile, there's potential for significant incremental demand from AI data centers, which consume a massive amount of electricity. The base case is that they could boost U.S. gas demand by another 3 to 6 Bcf/d by 2030, with an upside scenario of more than 10+ Bcf/d of additional demand. Kinder Morgan is well-positioned to capitalize on this opportunity, given its extensive pipeline network that connects key supply basins to major demand centers. Securing additional expansion projects would further enhance and extend its growth outlook.
Still potent in 2025
Kinder Morgan anticipates its growth resurgence to continue in 2025. The company also appears poised to further bolster its growth profile in the coming year. Therefore, it could have the momentum to keep rallying. Even though it's no longer as affordable as it once was, Kinder Morgan still trades at a lower valuation (its free cash flow yield of 6.5% is significantly more appealing than the meager single-digit level of the broader market). As a result, it could have the momentum to surpass the S&P 500 once more in 2025 if its growth acceleration continues.
The positive financial performances of Kinder Morgan in 2024, including its projected increase in adjusted EBITDA and earnings per share, have attracted investments from various financiers, indicating a strong interest in its money-making potential. In light of its promising growth prospects in 2025, with projected earnings rise and numerous expansion projects, Kinder Morgan's stock continues to hold a lower valuation compared to the broader market, indicating potential for further growth and potential outperformance of the S&P 500 in 2025.