SMACK! The thunderous market was turmoiling, lower and lower. Kinder Morgan (KMI) was taking a beating. They just announced news about additional investments, further deteriorating the credit quality by the rating indexes. From trading at $42.81 to begin the year and then plummeting downward to a spiral collapse at $16.42 on the close of 12/7, is truly amazing, a 62% decline from one of the Nation’s biggest/largest oil pipeline companies. Management kept enamoring a dividend focused strategy, to set increases at a % growth rate each year, and then committing by showing/increasing the dividend throughout the year. Interesting how the year really can unfold…
KMI Credit Quality news & Brief Background
Moody’s News on December 1, 2015 “…changed Kinder Morgan Inc.’s (KMI) outlook to negative from stable. Moody’s affirmed KMI’s Baa3 senior unsecured and Prime-3 commercial paper ratings. A complete list of Moody’s rating actions is below. On November 30, KMI announced an agreement to increase its ownership in Natural Gas Pipeline Company of America LLC (NGPL, Caa2 negative) to 50% from 20% for approximately $136 million. Brookfield Infrastructure Partners L.P. (BI, unrated) will own the remaining 50%. Proportionate consolidation of NGPL’s debt will add about $1.5 billion to KMI’s consolidated debt. NGPL’s trailing twelve month September 30, 2015 EBITDA was $273 million (gross).”
Moody’s News on December 8, 2015 “..changed Kinder Morgan Inc.’s (KMI) outlook to stable from negative and affirmed its Baa3 senior unsecured and Prime-3 commercial paper ratings. ” This came after a week prior of a downgrade to negative when KMI stated additional investment into a subsidiary. Why was the upgrade to the credit rating warranted? A monster 75% dividend cut… that’s what.
Very many lessons have been taken away from this news. I’ll first describe the dividend cut, the impact and why it is a good thing, but really – what the takeaways were from the change & announcement.
The Moster KMI 75% dividend cut
From the web, “On December 8, KMI announced that would reduce its annual dividend to $1.1 billion from about $4.4 billion and reduce its targeted ratio of net debt to EBITDA to 5.5x from 5.6x.” OUCH. I owned 139 shares of KMI, and was purchasing them deep into the October months. The impact was tremendous, as I was closing in on my 2015 projected dividend income goal during this month but had a huge set back with this announcement. From $283.56 projected going forward, this declined to $70. Think about that. I just took an approximately $214 hit, when I was SO close to my $6,750 projected goal by the end of the year. Since my last purchase of ADM this month, I am $254 away, aka I would only have been $40 away… that can be taken care of through dividend reinvestment, increases or a smaller purchase. Easy stuff, now, I lost a few steps on the mountain I am climbing. The pain, it hurts, it hurts. I know Bert feels it too, as he was purchasing KMI as well. And crap, just realized Bert’s article was about him also crossing a goal after his purchase. Ugh.
Ultimately, for KMI, this news and event means it can reduce it’s leverage, have more free cash flow to fund the debtors, as well as to continue their business at a more efficient level, as well as protecting additional investments if needed. I understand this was needed and for a big company like KMI, one can only think that the company will be strong again, once the balance sheet is cleaned up. One could even ask – is it a good time to buy them once everyone has jumped off of this ship? Is this company still fundamentally, in an industry that has oil prices declining to lows, strong with a wide enough moat to withstand this? I still currently own my 139 shares and have not made a move yet with them.
Reminders of about being a Dividend Growth Investor
Wow. This was big. This was my real first “big” downslide from a company in regards to their dividend. Sure, Glaxo Smith Kline (GSK) can have a fluctuating ADR dividend, as well as National Grid (NGG), but not really any material impact to my forward income (currency translations are amazing… not). But this, this was big. This even provided the following reminders to me about being a dividend growth investor and what my real eyes are going to be looking at going forward.
Company Goals & Strategies. This is too funny. I felt like the goal of Kinder Morgan (KMI) now was to have an increased dividend year after year. As if their primary goal was to do just that, and not really on the fundamental business model of being a pipeline company. Going forward, a reminder as a DGI is this – understand their business, understand their goals and ensure that it sounds like a fundamentally “smart” or “right” business strategy. An example could be from the 5 foundation dividend stocks, where as AT&T (T) will provide telecommunication services across a mass amount of people, McDonalds (MCD) goal is to provide you an efficient way to enjoy a meal at a lower cost or Proctor & Gamble (PG) to provide you health and beauty services to ensure you are clean and healthy.
Following the Dividend Diplomat Stock Screener. Obviously with KMI you couldn’t really lay your head on the payout ratio. Further, their Price to Earnings (P/E) couldn’t really be calculated accurately to help make you an informed decision. Let’s get back to the basics and look at growth history, payout ratios, price to earnings and yield. Such as when I bought ADM last week.
Dividend Growth Rate & History to Boot. KMI didn’t have the length of dividend growth that we as dividend growth investors like to see. See Bert’s always buy stocks, and you will find those companies that do have that growth rate, as we all know the DGR is critical to your portfolio, big time. My last purchase in ADM has over 40 years, Bert and I have both bought EMR plenty of times, and heck even with a weak as hell growth rate (Big companies increasing their dividend by small amounts), I am sure they will get back on track with better growth as they have done so over 58 years & going. I will take little dividend growth vs. a dividend cut, any day.
Don’t Chase Yield. Yes yes. Usually we do a great job at not chasing the highest yield out there, but when KMI was spiraling downward in price, I thought – well, if management’s goal is to keep increasing this dividend, and they just boosted it from $0.49 to $0.51 per quarter per share, then why not buy more at a lower price and grab that higher yield/more income? Wrong. The price was going down, not just because of the oil impacts, but because their balance sheet needs some serious work. Bottomline, don’t chase yield, I strongly recommend to play the long-term game.
Build Your Dividend Aristocrat Positions. Man… looking back at those additional investments, wish I would have just purchased PG, T, EMR, JNJ or ADM earlier. It all just makes way too much sense now. I was trying to reach a goal in the wrong way. Slow and steady. My new energized focus is to simply build on strong fundamentally sound companies. Companies that we all know, use, see and are very positive in the news. A good example are my thoughts on investing into Starbucks (SBUX).
The event has happened. You learn your best from mistakes or from events throughout your life, in this case, in this case – an event related to investment decisions. I am excited about what is to come from an investment stand point and how the focus has come back to life. This dividend cut has energized me and reminded me about what it really means to be a dividend growth investor. This community I know suffered from this news – some bigger and some smaller than others, but nonetheless, I know a great amount were impacted by this. We can only learn and move forward, make smarter decisions and really think about what we are buying when going into an investment decision. Look for fundamentally sound companies, that are undervalued if you can, do not chase yield and build on those positions on price dips/when you can.
Thank you everyone for coming by. How do you feel about this? Were you also reminded about what it means to be a dividend growth investor? Did you take the step back and look at what your real strategy and targets should be? Do, please tell, I am curious and would love to read your perspective. Thanks again, as always, talk soon.