After peaking at over $41 per share in late May of 2013, it has been a rough 13 months for recent investors of Kinder Morgan, Inc. (NYSE:KMI). Over the last 12 months KMI has produced a total return of -1.41% compared to 25.9% for the S&P 500 and 22.3% for the Alerian MLP index, calculated on a total return basis. During this same period, almost $14B of new institutional capital has flowed into the MLP sector by way of packaged products, such as closed end and exchange traded funds. At almost $72B in total AUM, institutional money flows are becoming more relevant to what has historically been a retail dominated market, and this article illustrates how these flows have recently impacted Kinder Morgan.
The basic, fundamental reason for the 25% share price drop was a forecasted slow down in the distribution growth of Kinder Morgan Energy Partners LP (NYSE:KMP) and a subsequent reduction in the growth of in the general partner payments made by KMP to KMI. Currently KMI is expected to grow its dividend by 8.4% over the next three years, compared to the mid to high teens growth rates on the year-over-year dividends being declared a year ago.
While there are fundamental reasons why the share price of any stock moves up and down, the stock exchanges are supply and demand markets. If more investors, traders and institutional money managers want to buy, the share price will rise. An excess of sellers will push the share price down until the price is attractive enough to bring a balanced number of buyers. Although the concept is basic to share price values, it is important to remember that it takes an excess of buy orders to drive shares higher, which often requires institutional participation. The aggregate of the Kinder securities have average daily dollar trading volume of $310,000,000.
Institutional Holders Dumped KMI
Institutional money managers file SEC Forms 13F listing the size of investment holdings. The latest 13F data is for Q1 of 2014. The Q2 filings will not be available until the end of July.
In the first quarter of 2014, institutional managers reduced their KMI holdings by 4.67%, from a year-end ownership of 534 million shares down to 509 million. For perspective, KMI has 1.04 billion shares outstanding. Longer term, a blended - from the 2013 Q2 and 2014 Q1 holdings - list of the largest KMI institutional investors shows their holdings dropped by 18.7% from the end of Q2 2013 through the end of Q1 2014. These holdings were 31% of the KMI shares outstanding at the end of June last year, down to 24.5% as of March 31 this year.
The numbers of KMI shares in institutional hands during the period when the share price dropped by 24% illustrate the supply and demand forces in the market. Over a 9 month period, the stocks largest investors unloaded 6.5% of the total shares outstanding, and during the same period, the share price dropped by about 25%.
Fewer KMP Units In Institutional Hands
As an MLP, Kinder Morgan Partners is less widely held by institutions, with most of the holdings concentrated amongst funds exclusive to the MLP sector. Since KMP is the second largest MLP, funds tracking the sector will to a certain extent own KMP units in significant numbers in spite of the market outlook. For example, an ETF tracking the Alerian MLP index will have 8.5% of its assets in KMP. In addition, KMP regularly issues equity units to raise growth capital, so funds may add to positions to retain a proportional holding.
At the end of Q1 2014, total institutional holdings of 85.2 million units were 19% of the total outstanding. During Q1 the holdings increased by 2.2 million units or 2.15%. During the quarter the number of units outstanding increased by 1.8%. For the period from the end of Q2 2013 through the end of Q1 2014, the number of KMP units in the portfolios of the 20 largest positions declined by 12.8%. During that same period the number of units outstanding increased by 8.5%. As a result, during the 9 month period, the holdings of the top 20 institutions dropped from 14% to 11.3% of the total outstanding units.
Institutions own a larger percentage (71%) of Kinder Morgan Management (NYSE:KMR) units, which mirror KMP units. The 10% decline from Q2 2013 to the end of Q1 2014 in KMR units owned by the 20 largest investors have a net effect of adding another 1% drop in units outstanding that are held by the largest institutional investor in KMP either through KMP unit ownership or including those backing KMR units. An interest point is that the largest investors own either KMP or KMR, but not both. Only three names are on both top 20 lists.
During the 9 month sell-off, the KMP unit value dropped by about 20% below the April 2013 high. Currently the trailing twelve month return including distributions is a positive 2.62%.
The chart below shows the price movements during these institutional outflows:
Institutions Back In During Q2, or Low Volume Bounce?
Over the second quarter, the KMI share price has recovered from the March lows and is now up 20% from that point, but still 10% below the 2013 first half highs. The question going forward is whether the share price recovery is sustainable, or just a bounce off of too deep lows. Since the 13F reported holdings will not be available until the second half of July, one clue from currently available information comes from trading volume. According to NYSE historical data, KMI had trading volume of 6.98 million shares per day over the 2013 first quarter. In contrast, over the last 90 days, KMI has traded on average 5.63 million shares per day. Volume has climbed to 6.82 million for the last 10 days.
The trading volume data leads to the hypothesis that the large institutional investors have not yet increased their allocations to KMI. To move again back above $40, Kinder Morgan - from both KMI and KMP - may need to provide forward visibility of more attractive levels of dividend/distribution growth. We will be listening to the Q2 earnings call on July 16th to see if the export infrastructure activity translates into a sustainable change to future distribution growth.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.