The entire energy sector has been going through a fierce sell-off over the last four months, in contrast to the broad market, which has been hovering around its all-time highs. Kinder Morgan (KMI) has not escaped the sell-off and thus it is now offering a 4-year high dividend yield of 8.5%. During sell-offs, most investors view such an abnormally high dividend yield as a signal of an imminent dividend cut. However, the dividend of Kinder Morgan is safe.
The pandemic has caused a severe recession in the U.S. Consequently, many companies have gone out of business and thus the total commercial demand for natural gas has decreased this year. However, it is critical to note that the effect of the coronavirus crisis on the natural gas market is much smaller than the effect on the oil market. The Energy Information Administration [EIA] expects the average annual U.S. demand for natural gas to decrease only 2.7% this year, from 85.0 Bcfd in 2019 to 82.7 Bcfd. This decline is nearly one-third of the 8.2% decline expected in the global demand for oil products this year.
Moreover, Kinder Morgan has a robust business model, which is exceptionally resilient during downturns thanks to its highly contracted cash flows. Approximately 68% of the operating profit of Kinder Morgan is generated from take-or-pay contracts, which pose minimum volume requirements to the customers of the company, while another 24% of the operating profit comes from fees, which are hardly affected by the gyrations of commodity prices. As the company also hedges 6% of its operating profit, it is evident that only 2% of its operating profit is directly exposed to the underlying commodity prices.
The limited effect of the pandemic on the natural gas market and the resilient business model of Kinder Morgan were