Kinder Morgan: Insider Buying Isn't A Catalyst

May.13.14 | About: Kinder Morgan, (KMI)


CEO Richard Kinder bought another 100,000 shares of KMI, but investors should not focus on this purchase.

Kinder has been repeatedly buying shares and has unrealized losses on these purchases.

Thanks to his nearly 25% stake, Kinder receives more in dividends than he is spending to buy shares.

Unless shares fall below $31, I prefer KMP to KMI.

When deciding whether or not to buy a stock, investors often look to insider buying and selling. After all, insiders have an intricate understanding of a company's fundamentals, which can make their purchases wise. Insider transactions can provide a gouge for management sentient, and while they can be wrong about the company's future, it is helpful to know what management really thinks. However, sometimes insider buying doesn't provide much of a catalyst for a stock, and investors should discount this news. That is the case for Kinder Morgan (NYSE:KMI).

On Monday May 12, CEO Richard Kinder disclosed he had purchased 100,000 shares of KMI on May 9 for $3.236 million (insider holding data available here). Shares haven't moved much on this news and have remained in the $32.40 area. That's because this share purchase isn't particularly material or unusual for Mr. Kinder. While $3 million matters quite a bit to most investors, it is more akin to pocket change for KMI's CEO. After all, he indirectly and directly controls 243 million shares of KMI, which is worth about $7.8 billion. Kinder owns nearly 25% of KMI. His personal fortune is already greatly tied to KMI, and an additional $3 million is relatively immaterial.

Now, no one likes to lose $3 million, even when they are worth billions. While this acquisition may be less meaningful than from a CEO worth $30 million, it still might be a good sign for shares. Unfortunately, this has not been true. This 100k purchase is not unusual, and Kinder has been buying some shares for the past year. Last June, he bought 500,000 shares at $35.78. In September, he added another 500,000 at $35.74. He bought 828,000 in December at roughly $33.35. He bought another 100,000 in February for $32.97. Each of these purchases is currently underwater. Mr. Kinder is clearly optimistic about the future of KMI, but he has been early in his purchases as investors focused on negative reports from Hedgeye and Barron's. Kinder's relatively small purchases are simply not enough to move the stock higher.

It is also worth noting that Kinder's stake in KMI generates a lot of cash. The quarterly $0.42 dividend results in a $102 million quarterly cash payout to Kinder. If he reinvested his dividend, Kinder could buy over 3 million shares this quarter. Mr. Kinder is pocketing more cash than he is spending buying the shares. Given how much wealth he already has invested in KMI, this is probably a shrewd personal finance decision. Still, this fact complicates the narrative about his insider selling as he is not investing new capital in the company but essentially reinvesting a fraction of his quarterly dividend payment.

Given these facts, I would not use Mr. Kinder's insider buying as a reason to buy shares. He has much of his wealth invested in the company and has been a buyer at higher prices. Investors instead such focus on KMI's core business, which is to be the general partner of Kinder Morgan Energy Partners (NYSE:KMP) and El Paso Pipeline Partners (NYSE:EPB). El Paso is struggling due to lower contract rates in Wyoming while KMP is seeing slower growth after having expanded so dramatically. As a consequence, KMI's dividend growth rate is slowing. Over the full year, I expect growth to be less than 10% and the payout to be roughly $1.72.

Overall, KMI continues to be a solid dividend growth stock irrespective of insider buying, but that growth rate is certainly decelerating. Nonetheless, a 5% yield is nothing to sneeze at. KMP continues to perform well, and KMI's IDRs are increasingly valuable as the partnership continues to report modest growth. However, problems in Wyoming could weigh on EPB's results over the next few quarters. KMI is paid handsomely to manage EPB, but significant growth in this payment is unlikely until 2016 at the earliest. Given the problems at EPB and the deceleration at KMP, I think a 5% dividend is not too far from fair value. I would wait for shares to trade back below $31 before buying KMI and would rather own KMP thanks to its 7% yield.

Disclosure: I am long KMP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.