If you are a dividend investor you may be invested in Kinder Morgan (KMI) as I am and you are desperately searching the internet for news about this company to find out why it was falling recently while scared that you may lose your hard earned money.
Kinder Morgan lost almost 40% from its peak and quite lot of people have gloomy prediction about this company. Analysts started downgrading the company and even Moody’s rating agency joined the group and lowered rating of Kinder Morgan.
When I pick a company to invest in I try to select one in which I can believe for the next 20 years without too much worrying about the stock and studying it anytime it goes down in price. However, the recent drop made me to check what’s going on with this stock.
So I searched internet and found so many people scared and predicting end of the titan. I have seen even experienced dividend growth stock investors bailing on this stock or being ready to jump the boat.
Although these investors have the right to do what they want and see fit to their portfolio, I disagree with those who pushed the sell button and run away from KMI. Here are my reasons for staying invested and even accumulate this stock.
First, let’s see why people were so negative about this stock. What I could find was two main areas of discontent.
· Bad acquisition
Kinder Morgan acquired a stake in Natural Gas Pipeline Company some time ago and recently they increased their investment in the company (NGPL). Many consider this a bad acquisition and investment because NGPL was a bankrupting company. Some say, KMI overpaid for the company.
I disagree with this view. Although, I am not an expert but considering that KMI is primarily a transporting company involved in natural gas, this was a natural result of capitalist behavior – taking over a weaker company and their infrastructure which under a new stewardship will prosper.
Don’t we see that over and over happening? Even A New England wire and Cable company was taken over because it was weak and making no money! It was more worth dead than alive. NGLP is more worth when navigated by Kinder than on its own.
Moreover, by acquiring NGLP Morgan gained access to locations and areas which would allow the company to better arbitrage and deliver natural gas to places where they can better profit from it.
· Exposure to oil
I think this is a big misconception and misunderstanding of how Kinder Morgan makes money. This company is not involved in production of oil whatsoever. The company is involved in its transportation. It is an oil UPS version. So, no matter what the price of oil is the company would be making money. While other oil involved companies were losing money (almost the entire 2015) KMI remained profitable showing $186 million profit during the third quarter on $3.7 billion in revenue.
So KMI is exposed to oil indirectly and its price doesn’t influence the company. As long as people will need and use oil, KMI will make money on it. However, majority of the business is in natural gas.
· Dividend cut
Recently KMI followers and analysts expressed their belief that the management should consider a dividend cut although the financial reports indicate that they can easily cover the dividend. I have seen investors claiming dividend unsustainability of companies for many years. A good examples are Realty Income (O) or AT&T (T) when investors claimed that those companies would cut the dividend soon. I have heard them saying this for many years, yet both companies managed to pay dividends for 40 or more years and increasing it for a similar amount of consecutive years.
Yet the analysts caused a big panic among investors and they sold the stock pushing its price to $16 a share. Is this justified?
The 2016 dividend obligations are expected to be at approx. $4.55 billion, with current cash flow KMI should have $450 million in excess cash flow and $705 million in cash reserves. The dividend is secured at least for 2016.
Even if they cut the dividend and the price drops lower, I will continue investing in KMI as I will show later.
· Stay the course
You may do whatever you want, but I stay the course, keep the company, reinvest dividends into the company, and even put more capital in it. Why? As I mentioned above I do not think that this crisis is anything KMI wouldn’t sustain.
In the past, I have seen companies being bashed, downgraded, predicted to bankrupt and yet they survived. One example is Johnson & Johnson (JNJ) which a couple of years ago had a significant products recall hurting company’s revenue, cash flow, and profits. Analysts and investors were predicting an end of JNJ, being spun off into several smaller companies and the losing one either sold or dissolved. The dividend was predicted to be cut or even suspended.
Any of it happened and JNJ which fell hard in price now doubled and its dividend continued growing.
KMI is now compared to another Enron and bankruptcy is predicted. Such comparison is obviously ridiculous and shows that the investor making such comparison has no understanding of KMI business.
There is however, one big issue why I stay the course (and which goes to the JNJ example a few years ago): consider your investment time frame. Are you invested in this company for the next two to five years? Are you already retired? Or are you at the beginning having the next 20 to 25 years ahead of you?
If you are a retiree, a portfolio adjustment can make sense. To me, it doesn’t make sense at all. I started investing in this company three years ago, accumulating slowly, and reinvesting dividends into it. I believe in this company and its management and I am in it for the next 20 or 25 years. I believe, that five years from now, this crisis will be forgotten.
So, even if KMI cuts its dividend, I will continue investing in it and reinvesting dividends because once this panic and “crisis” is over, the stock price will be going up again and all I miss on dividends now I will make in capital appreciation later. Even if it takes two or more years to wait. I have a plenty of time. And in the meantime, I believe, KMI will start raising the dividend again.
What do you think about KMI? Are you bailing out or going to weather this panic? From my trading experience, trading SPX I can see what the market can do when it is in a panic. It can recover as quickly as it fell down. Since the price action of KMI is a panic reaction, five years from now, nobody will remember this the same way as no one remembers JNJ crisis anymore.