With new tax laws in its favor, Kinder Morgan Inc. (KMI) announced Wednesday it will move away from an earnings per share policy and focus instead on shareholder dividends. As part of its new policy, KMI plans to increase its quarterly dividend to 40 cents a share, or $1.60 annually, up 167% from its current 15 cents (60 cents a year).
The increase, approved by the board of directors, will be effective with the next regularly scheduled dividend, which is expected to be paid Aug. 14 to shareholders of record as of July 31.
“When we increased the dividend last January, we announced the potential for a significant additional increase if the tax laws were modified to reduce the double taxation of corporate dividends,” said CEO Rich Kinder. “In response to the recently enacted federal tax legislation, we are changing our dividend policy to maximize the benefits to KMI’s shareholders. KMI is a significant generator of cash flow, and we expect to continue to return that cash to our shareholders in the most tax-efficient manner while maintaining a strong balance sheet.”
In January, KMI published a financial plan that projected $470 million of cash flow available to fund expansion capital expenditures, debt reduction, dividends and share repurchases. However, KMI now expects to generate $530 million of cash flow that will be available to fund these items.
The expected increase in cash flow was attributed to improved earnings (primarily from growth at TransColorado and lower interest and general and administrative expenses) and from a reduction in current cash taxes. As a result, KMI expects to increase the amount of debt reduction and to shift cash from share repurchases to dividends in 2003.
KMI said that going forward, the company expects “sufficient growth in earnings and cash flow to fund modest expansion capital expenditures, to continue to reduce debt and to support additional dividend increases.” The company expects to provide more detail on its 2004 plans when that budget is completed in the fourth quarter.
“Over the last few years, we have used a combination of dividends and share repurchases to return cash to our shareholders,” Kinder said. “Given current tax policy, our method in the future will focus primarily on dividends. Despite this shift toward dividends, we still expect annual percentage growth in earnings per share will be in the low double digits over the long-term.”
All dividends still must be approved by KMI’s board of directors.
In response to the announcement, Standard & Poor’s Ratings Services (S&P) analyst John Thieroff said the changes would have no immediate affect on the rating or outlook of the company.
“The dividend increase, about $125 million annually, is expected to be funded largely through a reduction in share repurchases and cash flow in excess of original forecasts,” Thieroff said. “Going forward, Standard & Poor’s expects that funding of dividends will not detract from debt reduction nor impair capital spending necessary to maintain the company’s current credit profile.”
The analyst noted that if free cash flow suffers as a result of the increased dividends “such that credit measures deteriorate meaningfully, the outlook and ratings…could be lowered.”
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