Kinder Morgan is On Sale Again With a 6% Dividend

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Kinder Morgan is On Sale Again With a 6% Dividend

by Charles Lewis Sizemore, CFA

It’s been an absolute bloodletting in the midstream oil and gas MLP space. As the bear market in oil prices has taken another leg down, everything even tangentially related to energy has gotten crushed. Even the blue chips with minimal exposure to prices have been left for dead. Kinder Morgan (KMI) and Enterprise Products Partners (EPD) are down 23% and 28%, respectively, since late April. Seaborne midstream MLP general partner Teekay Corp (TK) is down by about a third.

Whenever I see destruction like that, it gets my attention. A stock is not always a bargain because it has fallen in value. Sometimes a cheap stock is cheap for a reason. But as often as not, the market really does overreact and presents us with a good buying opportunity. Let’s take a look at Kinder Morgan and see if we have one of those opportunities today.

The selloff in Kinder Morgan and other MLPs this summer has been peculiar because KMI stock mostly avoided the pain that hit the rest of the energy sector a year ago when the price of crude oil first began falling. The massive declines are happening now, months after the oil supply glut should have been old news. Some of this is due to belated fears that U.S. domestic production – which has been slowing in recent weeks – will crimp the volume growth that drives pipeline profits. That’s a legitimate concern. But hardly one that would justify this kind of move in the stock price.

Particularly when you consider Kinder Morgan’s most recent quarterly earnings release. Kinder Morgan increased its project backlog by $3.7 in the second quarter to $22.0 billion, meaning that KMI has no shortage of growth prospects in front of it.

Lower energy prices are a problem, to be sure. While KMI gets the vast majority of its revenues from fee-based contracts that are not sensitive to energy prices, the company is not completely immune. KMI estimates that every $1 change in the price of crude oil lowers distributable cash flow by $10 million. That sounds like a lot of money, but remember that Kinder Morgan produces over $15 billion per year in sales. Even at today’s depressed priced, KMI generated enough distributable cash flow in the first half of the year to cover its dividend with $226 million to spare.

And speaking of that dividend . . .  last month Kinder Morgan raised its dividend by 14%. And management reaffirmed that it intended to raise KMI’s dividend by at least 10% per year from 2016 to 2020.

At today’s prices, KMI’s $1.96 per share dividend works out to a yield of 6.1%. If KMI is able to follow through on its promise of 10% annual dividend growth, by 2020 its annual dividend will be a cool $3.16. That works out to a yield on today’s price of 9.8%.

Between the current dividend and the expected growth rate, you should be looking at minimum annual returns of about 16% per year over the next five years. That’s enough to double your money.

And don’t take my word for it. Watch what the company insiders are doing.

Richard Kinder, the founder and chairman of Kinder Morgan, bought over $11 million in KMI stock in June and July. And since December of 2013, Mr. Kinder has spent $56 million of his own money buying shares.

And he’s not the only one. Board member Fayez Sarofim dropped $17 million last month buying shares, and since December of 2013 various Kinder Morgan insiders have plowed nearly $90 million into company stock.

It’s worth noting that Richard Kinder takes no salary for his work as chairman. His only compensation is via the dividend on his vast holdings of KMI stock. So it’s in his best interests – as well as ours – to keep the dividend checks growing.

After the recent rout, KMI stock is a steal. Use this lull as a buying opportunity.

Disclosures: Long KMI, EPD, TK

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. 

This article first appeared on Sizemore Insights as Kinder Morgan is On Sale Again With a 6% Dividend