First, here is a bit of background on me, since this is my first article. I am a relative newbie at Dividend Growth Investing, with about one and a half years of experience at this point. I am nearing the distribution phase of investing, so I am very focused on income. Most of what I've read and learned has been via a good friend, or sourced directly or indirectly from this section of Seeking Alpha. As I've read through many different articles by many different authors, I've found a good number of DGI articles that offer good advice and comments. Thanks to all for sharing you experience and approaches. In this case, I own Kinder Morgan Energy Partners LP (NYSE:KMP) and wanted to determine the Income Impact of the Kinder Morgan Incorporated (NYSE:KMI) buyout.
Assumptions and Approach
The general approach is to compare the income that I expected to receive from KMP for the next 10 years to the income now expected from KMI. As part of the comparison, I decided to look at 2 approaches for handling the buyout.
Reinvest the cash payout in KMI. This makes the transaction equivalent to a 100% exchange.
- Keep the KMI shares and the cash payout as income for 2015. This gives a nice immediate income boost and should help to cover the lower annual income of KMI for the near term.
Here are the details for the buyout and anticipated dividends and dividend growth going forward. I used the company projected dividend growth for KMI and KMP through 2020 as the factor for the entire period (through 2024) in the absence of any other guidance or data.
- KMP holders receive 2.1931 shares of KMI for each KMP unit.
- KMP holders also receive $10.77 in cash for each KMP unit.
- KMI price for purchase of shares is $38.89 (price from 8/13/14).
- KMI projected dividend is $2 per share for 2015.
- KMI expected dividend growth rate is 10% 2015-2020.
- KMP expected dividend growth rate was 5% 2015-2020.
- 2014 KMP dividend income is based on no increase for October payment. This works out to 4.9% dividend growth for 2014 for KMP and is in-line with projections. A $.01 increase for October would increase the income of KMP by only about 0.18% each year.
- Tax payments that may be due after the buyout are not included in the analysis.
- Impacts of inflation are not included.
What Do the Numbers Say?
Figure 1 shows an Annual Income Comparison based on owning 100 shares of KMP. The vertical axis is annual income and the horizontal axis is the year (2015-2024).
Figure 1 - Annual Income Comparison
The graph shows the immediate income boost by holding the cash portion of the buyout. Perhaps more enlightening is the point where the lines cross. For the case where the cash is retained, the KMI dividend income is expected to start to exceed the KMP dividend starting in 2021. Based on the KMP reinvest price assumption, the KMI divided income goes above the KMP income starting in 2019, so that is 2 years earlier. Also, given inflation, the real value of the KMI dividend will take slightly longer to catch up since the new dollars are worth somewhat less.
However, the issue with this data is it only tells the incremental story, but not the total income story. Figure 2 provides a total income picture by year.
Figure 2 - Total Income Comparison
Based on the scale of the payment, the lines look quite close. Checking the data, the KMI+Cash total income remains about $450 (2.1%) higher in 2022. The approach of rolling the cash back into KMI shares shows a tight correlation to KMP income, although a little behind until about 2022. Taking the cash as income shows a nice advantage in total income for a long time. Reinvesting in KMI finally becomes the higher total income approach starting in 2025. This was a surprise to me and reminds me why I like to look at the numbers! It seems that my "gut feel" for these items don't always stand the "Show Me The Numbers" test. I guess I will need to reconsider my plan.
The buyout of KMP by KMI impacts the income flow of KMP holders. There are several options on how to manage the holdings, and the decision is heavily based on the goals and situation of the investor. Given a long-term perspective focused on income, a key factor to consider is when the income is needed. If income is needed sooner, then keeping the cash payout seems worth strong consideration. I have to say from my situation, I'm leaning this way right now. If a very long-term perspective is taken, then investing the cash back into KMI may provide superior income in the long term, but patience is required. Of course, this is all based on the assumptions above, and as KMI prices change, the comparison will vary to some extent. Good luck!
Disclosure: The author is long KMP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.