The Reminder of being a Dividend Growth Investor from KMI’s News

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).”

and then…

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)

concluding comments

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.

-Lanny

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43 thoughts on “The Reminder of being a Dividend Growth Investor from KMI’s News

  1. Lanny,
    I felt the slap in the face as well, though not as seriously as you. Still my KMI is a Roth account, so it does leave my face sore. I’ve not made a move either, I am still debating my steps forward with them and have hemmed and hawed over it. I probably will wait to act until after my Chubb stock changes over to ACE.
    It has made me think more about DGI, in terms of going after companies with longer history (at least that is available to me the little consumer). I just bought ETN, a company with a long history that is easily followed, KMI was not that kind of animal. Sure some of those companies make sense to hold, but it is my goal to go for more established companies moving forward.
    – Gremlin

    • Grem,

      I know, I know. I read their investors call and it appeared positive in their responses. More established companies, strong brand loyalty with big moats. Keep moving forward DG, that’s all we can do!

      -Lanny

  2. I really liked the intro to this article! I saw a comment on Seeking Alpha about a retiree who had 50% of their portfolio in KMI…. More than anything, it shows how important diversification is – you can’t have all your eggs in one basket, or all your investments in one MLP.

    • Ben,

      Thank you very much! This means a great deal to me, your kind words are appreciated.

      50% into KMI!? Holy crap. I would have no idea what to do if a 50% position cut its dividend this much – hope he could sustain it somehow. No way you could have all eggs in one basket, we know better and need to go far from that, that’s for sure.

      Thanks again Ben, the transcript I read shed brighter light for sure.

      -Lanny

  3. Nice write up! Although we don’t own any KMI, we do feel you pain (other stock, same issue). Guess this is why you should diversify your holdings 😉 It does make you wonder about DGI, but a long term outlook remains the best way to go forward we suppose, and occasionally reconsider your portfolio to evaluate performance.
    Cheers!

    • CF,

      Thank you and I am sorry that you also feel the same with a different stock.

      Diversification is key and your metrics/screening items need to be on point. Long Term = better views on any purchase from us DGI standpoint. This one will be a 2018 view, 2 years… I feel like, before we see any shake up with the dividend.

      Luckily, had a nice position BUT not a big position that de-railed my portfolio, took a few steps back and have to work hard to keep moving forward. It’ll be okay.

      Thanks again for coming by!!

      -Lanny

    • Sam,

      I own both. One positive thing BBL (ADR) has is it is a semi-annual dividend. Hoping they are able to see an upswing with their commodities and push through. These monster companies have to be able to maintain their balance sheets, right?!

      -Lanny

      PS Do Not plan on selling You?

      • Hi guys,

        Quick note as an Aussie so I follow what’s going on with BHP quite closely. I’d say there is only a very small chance they won’t cut their dividends. With the change in the exchange rate, to pay their dividends they would have to borrow to pay the same (and increasing!?!) dividends in $US. This was likely to happen even before the accident in Brazil. I don’t know if you’ve seen any documentaries on the ghost cities in China (new cities with no-one in them), made out of all that lovely steel (iron) from BHP and others. There isn’t going to be a big swing any time soon back to ‘normal’ prices for iron or BHP. In the long run perhaps, but either they cut the dividends to give them a good chance to be in a strong position for the future when the commodity cycle is positive again. Or they keep paying unsustainable dividends in the short term. Which would you want BHP to do?

  4. Great reminder. I took a similar hit with LNCO that completely cut its dividend in October. I am hoping to salvage something from my shares. It is a small part of my portfolio (3%), but it was a big part of my dividends.

    I leave a small allocation of my portfolio for speculative stocks, and LNCO is my speculative stock. Diversification and understanding the business are key.

    • Novice,

      Thank you. This is why we diversify and don’t have huge portions of our income single handedly in companies.

      We will perceive and move through this. May take a few small steps, but time will heal this as well.

      -Lanny

  5. Hey Lanny. Thanks for the article bud. No more Risky high yielders. From now on, we’re gonna help each other and remind each other to only stick w High Quality. Like you, I thought to myself, instead of investing in KMI, I coulda bought more JNJ, PG,UL, UNP … And still get paid. All good and we live we learn. Let’s keep it up and hustle hard Lanny. Cheers and happy holidays my friend.

    • Hustler,

      Man.. you and a few others, including Bert and myself, were who I thought of. No more of this, that’s for DAMN sure.

      We need to keep each other with that quality. JNJ, PG, you know the drill with those. In 2-3 years, those companies yield on cost would be higher than KMI, and now, KMI is at 3% yield… damn. Tough, very tough.

      Live and learn – that’s what it’s for and good thing for us being younger at the moment. Happy holidays, of course, to you as well DH – stay on the grind.

      -Lanny

  6. It just shows that the best foundation companies are ones that people will continue to use in good times and bad, such as P&G and J&J. Companies in sectors that have the potential for wild swings (like we are seeing in energy) can take your portfolio for a ride. However, if you stay focused on the long-term and continue to believe that KMI is a solid company with a good business, you should still be able to feel secure in owning them.

    • IPD,

      I know, it really does, it really, really does. I do feel secure in owning them, moreso after reading their investor transcript from earlier this week. A lot of positives coming from this. However – I will be taking that harder look at balance sheets and length of dividend + Growth history, as well as brand loyalty going forward. Such a long road! We are learning, still, though, that’s for sure.

      -Lanny

  7. Nice info here and some great reminders Lanny. I sold my KMI November 10 still had some lossess but not great. But i like your comments about slow steady dividend growth and focus on the fundamentals.

    Cheers
    Dividend Pursuit

    • DP,

      Nice, you were able to definitely reduce some massive losses at that given time. Slow & steady is going to win this race, not hot and sexy as I thought. Lessons are being learned and I had to take the steps back, glad you were able to wipe the hands and start fresh with the capital from it!

      -Lanny

  8. Since I’m in it for the long-haul, while it sucked, it was obviously the right thing for the company to do. One of the most important reasons as to why I like KMI is because of Richard Kinder and management. They’re heavily invested in the business as well as it’s success and are a smart group. It still yields a solid 3%. While I won’t be outright purchasing more for right now, I will be DRIPing.

    • Dan,

      Easily the right thing for the company. Heavily invested and they are taking their “hits” on what they are used to for sure. DRIPing still as well over here… waiting on those upcoming financial results now!

      -Lanny

  9. I bought KMI 10 shares at a time. I’m at 70 shares now, and I’ll continue to hold on to the shares as long as it keeps paying dividends.

    I suspect it will get bought out either by its parent company or merge with other pipelines if shares continue to deteriorate further down.

    • Viv,

      I bet your average cost basis is lower than mine, that’s for sure ; )

      I never really thought of it as a buyout opportunity, but given the deterioration to the market cap, I assume that’s a possible feat. Interesting take!

      -Lanny

  10. I guess I’ll never repeat it enough. To ensure dividend growth, the company must show growth period. KMI didn’t.

    And yes, diversification prevents from losing it all with big cuts.

    Cheers,

    Mike

    • DivGuy,

      You are right on the money – look for that growth period, look for those multiple years of steady growth. KMI only showed it wanted to grow the dividend, period. Well, now we have to see if they can grow it steadily and slow into the future.

      Focus now is really on those aristocratic based companies, finding undervaluation and striking when you can. Hope all is well DG, thanks for coming by!

      -Lanny

    • Captain Dividend,

      Not a bad move at all – and you were able to capture the increase in dividend yesterday from AT&T – their wonderful tradition of $0.01 increase every year per quarter! I am wondering if once they cross $0.50 per quarter, if they have to think about doing $0.02… as that 2% increase will look even more dismal – but hey better than what KMI did, eH? Congrats.

      -Lanny

  11. I was a KMI investor too. That dividend cut hurt, but it was for the good of the business. They have strong assets in natural gas and, if they stay conservative and pay down that debt, they will grow that dividend back. Part of me wonders if the 75% cut was psychological (so that they can later say “After the cut, we DOUBLED our dividend in one year!”).

    They are committed to paying and raising that dividend. That’s a good thing, but they seemed to have been so committed to it that they almost sacrificed their credit rating (and their ability to do business) in order to pay a dividend they couldn’t afford. Hopefully this will be a wake-up call to Richard Kinder. Remember, he’s a major shareholder. I promise you he’s more interested in seeing those dividends than all of us combined. So as long as he’s calling the shots, I have a feeling that everything that has to be done to safely get those dividends back will be done.

    While the company found itself (or put itself) in a bad spot, cutting that dividend was the right thing. They have real assets in those oil and gas pipelines. Kinder’s stake and their previous actions show me that they are committed to that dividend, and the dividend cut shows me that they take the health of the business and the SAFETY (rather than just the size) of the dividend safely. So I’m cautiously optimistic on KMI.

    There’s blood in the streets of a business that I’m bullish on. I’m not going to buy any more shares right now. I ALREADY HAVE.

    Sincerely,
    ARB–Angry Retail Banker

    • ARB,

      LOVING the comment. Intense. I’ll say this:
      1.) They could easily slay the dividend and bounce it from $0.125 to $0.25 in a fairly short manner, bringing the life back to it, as long as they kick ass – which Richard always wants to do… haha
      2.) Committed to the dividend = great, but doing it in a strategic smart fashion to not destroy the balance sheet and thus streaming that down to their credit ratings and borrowing capacities. Business First and then Dividend Second.
      3.) It was the right thing, hands down.
      4.) You are a brave man, and love KMI – I respect that and had conversations with Bert about – why not buy them at $15 per share if they have just cleaned the heck out of the balance sheet? I think I want to build more foundation assets first, KMI has hovered between $15-$16 now for the last 2 weeks since all of the announcements, so hasn’t moved quite yet.

      -Lanny

  12. Yes, dividends are never guaranteed even from the aristocrats. Look at what happened to GE or other dividend stalwarts like WFC during the meltdown of 2008/9. Don’t beat yourself up too much but it does seem that you learned a valuable lesson that there are no shortcuts for achieving a dividend income goal. It seems that many in the DGI community are so wrapped up about our dividend income updates that higher yielding, riskier stocks are often purchased just so that an arbitrary dividend income goal can be met. All my years of dividend investing I never made a goal to reach a specific number, rather just looked to increase my overall dividend income from the previous year. Time is the most valuable asset when being a long term dividend growth investor and not yield. Time allows you to focus on the lower yielding, less sexy aristocrats but offers greater stability and consistency over that time.

    • DivHut,

      Thank you for coming by. You are damn right, pains me to say that – Dividends are never guaranteed, they are based on the health and capital structure of each entity.

      Time is the most valuable asset and I usually have a rough template of goals for the next 5 years – let’s just say – those have been extremely modified, that’s for sure.

      Cheers to doing the right and smart thing DH – thank YOU.

      -Lanny

  13. Its amazing to me how quickly I have seen other DGI bloggers change course over this whole KMI dividend cut. Everyone preaches that “I’m following a method” or “I do thorough analysis on my investments” until they hit a minor bump in the road… Investing isnt guaranteed and line graphs dont always look like perfect 45 degree angles….

    Without naming names, I have even seen others talking about taking money out of the market and making CD Ladders for fear of the market turbulence…. To me, all credibility lost right there.

    I do enjoy your blog, just had to vent a bit about the whole community a bit!

    • Brian,

      Thank you for coming by. Vent away son!! I love it. And yes – we do learn lessons, as I learned a big one here – I never looked at their debt structure on how they were able to fund projects and their dividend. I’m still investing my ass off – don’t you worry – I am currently buying long term dividend increasing companies at valuations that are better than they have been trading at previously – eh? How does that sound? In it for the long haul my friend!

      -Lanny

  14. Lanny,

    I’m right there with you! It was a great learning point for me. I am going to be stubborn and hold my KMI shares and see what happens. I consider the money I (hypothetically) lost and lost income to be worth it for the teaching point. It will hopefully save me more money down the road when I’m at a larger portfolio. Thanks for the article!

    JT

  15. I think this is a perfect example that you can’t look at dividends purely just for dividends. Growing dividends are the main, ultimate and final sign of a company that has grown its earnings, it’s the growth of earnings in a sustainable manner that is most important. Whether a company has grown its dividend for 50 years or 2 years, if its earnings aren’t going to keep growing to match that, it is digging itself into a bigger hole every time it pays dividends beyond its means, if it takes money away from future earnings growth for current dividend payouts, you know? It matters what’s going to happen for the next 25 years, not necessarily what has happened in the last 25.

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