With the stock going down precipitously this year, I have been asked by readers what I am doing. This is not a complete detailed analysis – just a few random thoughts.
Before I start, I have been doing tax-loss harvesting.
But I generally see several outcomes.
The first is that the company stops raising the dividend, but slashes its growth capital expenditures (Capex) budget ( though maintaining the maintenance capex expenditures). Given the low share price, the dividend yield is high, which causes the cost of capital to be high. Given the level of debt, the company will be unable to sell a lot of debt in order to grow. I believe that the company has the ability to fund the dividend from current cash flow from operations or DCF, as well as funding any maintenance capex. When cost of capital is high, the rational decision is to postpone investment. Otherwise, the company is leveraging itself and levering up when it should be staying put. Either way, as long as the dividend is paid, I will hold on to the shares. I will allocate the dividend elsewhere.
The second option is that the company cuts the dividend. It is quite possible that this will be the low for the stock price. However, since my goal is to hold shares in companies that tend to increase dividends through thick and thin, I am going to sell the shares. I bought Kinder Morgan units and shares because I believed that management knew what it was doing in allocating capital wisely in an effort to grow distributions or dividends to partners and shareholders. I am not going to tolerate managements that make decisions that lead to a dividend cut.
The issue with entities that rely on capital markets for funding of their growth is that they are at the mercy of short-term market fluctuations/opinion. When capital markets shut down, the company is unable to finance growth capex. Therefore, a decreasing share price becomes a self-fulfilling prophecy, because it raises cost of capital and reduces the ability to re-finance at favorable terms or grow the business. This is probably why some short sellers have been so vocal about Kinder Morgan for over two years now.
Overall, I have not been impressed with how management has acted in the past few weeks. First they sold convertible debt at a high yield of something like 9.75%/year. Then they decided to acquire more ownership of NGPL, which is going to lever them up further, since cost of capital is high. The fact that Moody’s cut the rating is a negative, since this could increase the cost of borrowing. The positive is that the other ratings agencies kept their ratings unchanged.
I will keep the shares I have for the time being, for as long as the dividend is kept. If the dividend is cut, I will sell the majority of my position. However, if the dividend is subsequently increased following a dividend cut, I would strongly reconsider adding to the stock in my own portfolio.
I have read a few interesting articles on Kinder Morgan, which I am going to share below:
- What Happened in September: Six Things Only People Who Followed MLPs During the Financial Crisis Will Remember
- MLPs for the Long Run
- Thoughts on Kinder Morgan After the Barron’s Blast
- Kinder Morgan Inc Buys Into Higher-End Dividend Growth
- Kinder Morgan’s investment grade rating at risk as Moody's lowers outlook
What is your opinion on Kinder Morgan Inc (KMI)?
Full Disclosure: Long KMI
- Tax Loss Harvesting for Dividend Investors
- Richard Kinder: The Warren Buffett of Energy
- Kinder Morgan to Merge Partnerships into One Company
- Reinvest Dividends Selectively
- Kinder Morgan Limited Partners Could Face Steep Tax Bills