First KMI... Now BBL... The Pain

Includes: BBL, KMI
by: Dividend Diplomats

Here I am again… hurting, almost feels like the knife that went in the first time was starting to come out, only to be pushed, but this time twisted. Another dividend cut, the 2nd one in three little months. Another commodity dependent business - BHP Billiton (NYSE:BBL) cut their dividend, by an almost "coincidentally" 74% - the approximate figure that KMI also cut theirs by. This didn't just sting, this burns, but it is a very & true learning experience for me. Read on…


Here I was in December looking to hit my 2015 goal that I established towards the end of 2014. The oil and gas markets kept plummeting and Kinder Morgan (NYSE:KMI) decided it was best for the company to cut their dividend down from the recently increased dividend of $0.51 per share per quarter to $0.125 per share per quarter. I owned approximately 140 shares then, and wow… the $214+ that my forward dividend income declined by hurt and that hurt bad. But it did give me valuable lessons and reminded me again what it truly means to be a dividend income investor. Even after this significant dividend and investing event, my gut and eyes would always burn with an "uneasy" feeling when seeing the ticker BBL on my portfolio listing. I always kept thinking - since the ADR is semi-annual, maybe the dividend won't be impacted by the swings in prices occurring in the market. At the time they were $75B in market capitalization - how could they not withstand this? This iron ore, mineral building and extraction company had a great wall to defend itself as their blood is composed of this right? Think again.

News from BBL

BHP Billiton… oh BBL… I read your earnings release. $7.8 billion impact from weak commodity prices. Think that alone would easily lead to a dividend cut, bar none. They have reduced spending and well, I will say - this story and plan are VERY familiar. Enter the KMI ticker into this news release and I think you end up reading the same thing. They want to free up their cash flow. They want to protect their business. They have now acknowledged the commodity price deterioration isn't a short-term blip, but a longer term sickness that needs long healing. They want to push forward but do it in the "right" manner. They want to keep shareholders satisfied and know that to protect their best interests - they have to become a more sound business. Very similar to KMI.

BBL's new policy now is a minimum 50% payout standard and the board will have to approve anything higher than that. This is paid easily via free cash flow. What is also nice to see is they sit on $11B of cash and have similar current payable amounts combined with current portions of long-term debt. I understand what they are doing, but I just am unsure of what or for how long the commodity price tranches will be and if they can continue to suffer net losses continuously. However, cutting their dividend was the right thing to do, so much cash is saved for the business.

A new, HIGHLY valuable lesson is imprinted over this given the last few statements above. Payout ratio. Most of these companies were riding so high, well above the 80% pressure hold of a payout ratio and some closer to 100%. This is a warning sign (unless you are a REIT, different discussion). This is why when we go through our dividend diplomat stock screener to always look at the payout ratio and try to find an investment at the happy medium - as they can withstand this undoubtedly. A good example of the stock screener in use is our recent T. Rowe Price (NASDAQ:TROW) stock analysis, and yep - there they are, right under a 50% payout. Another lesson here is - the impact of commodity pricing on big businesses, not just the small ones, is very, very apparent. The big guys aren't safe anymore and I would consider BBL a big player, as well as KMI.

As we progress through 2016, and to align with my goals and the lessons learned above and through KMI - my purchases are going to be, well, more boring to say the least. I know my mountain just grew a few more feet ahead of me, as I owned 63+ shares of BBL aka $156 to $40… $116 of forward income has been reduced, which is easily a $3,000+ investment… hence my new focus on making larger investments as opposed to smaller ones. My purchase of ADM back in January is now essentially a wash. Poof, gone. Dammit.


So with KMI and BBL combined, $330 has been reduced from my forward income. I'm upset at myself for not taking a deep breath and understanding more of what really makes sense out there. I couldn't predict this to occur. I am not a commodity trader, nor do I read the details on what's occurring in that market. That's okay, though. I need to stick with what I know, such as the 5 foundation stocks for a dividend portfolio or other stocks that we discuss amongst our top 5 lists that we share with the community. Definitely a setback, but what is life if you never have to get up from a fall, right? I'm pumped as ever and know this is a hurdle that I'm going to fly over. I'll be over $7,000 in projected income before the end of April. Mark it down. This then would give me 8 months to add $1,000 more to the forward income goal. It will all be OK.

Enough about me - what about you? Did you feel the impact? Do you own BBL? What do you make of it and/or do you feel they will be an okay business going forward? Please let us know and thank you, God bless and keep at your dreams and goals!

- Lanny