Pipeline operator Kinder Morgan, Inc. (NYSE:KMI) has not been a winning investment for many shareholders, at least not for those investors that were in it for the dividend. Kinder Morgan made a compelling dividend value proposition last year: The company wanted to grow the dividend by 10 percent each year until 2020, and the shares were yielding somewhere around 5-8 percent at the time. Both investment yield and dividend visibility were great, two big reasons to buy the company, but the abrupt 75 percent dividend cut at the end of last year immediately rendered the dividend growth story irrelevant.
As a result of the dividend cut, Kinder Morgan's shares fell off a cliff. Investors buying into the dividend growth story at $30, or even $40, were left holding the bag. Today, Kinder Morgan's shares change hands for just ~$18, selling substantially below the prices we have seen a year ago. In April 2015 Kinder Morgan sold for prices north of $40, a big difference compared to today. KMI, in fact, crashed ~58 percent over the last year, but has recently gained some ground on the back of a recovery in crude oil prices that moved back up to $40/barrel, and improving investor sentiment.
Strong Rebound In Market Price
When energy companies fell to a new 52-week lows in January, doubling down on midstream pipeline operators would have made a lot of sense. Kinder Morgan's shares, for instance, fell as low as $11.20 on January 20, 2016, but have since rebounded strongly: KMI is up ~60 percent (!) from its 52-week low just three months ago.
The serious decline in valuations of energy companies in the fourth quarter of last year has even attracted Warren Buffett's investment company Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), which accumulated 26.5 million shares of Kinder Morgan, and Appaloosa Management, David Tepper's investment vehicle, which bought 9.4 million shares.
Investment Yield Too Low, Lack Of Dividend Visibility
Since Kinder Morgan has recovered from its lows at the beginning of the year, and shares are no longer oversold, I have decided to liquidate 1/3 of my position in the pipeline company because of Kinder Morgan's low investment yield and a lack of near-term dividend visibility.
Kinder Morgan's shares throw off a quarterly dividend of $0.125/share, or $0.50/share annually after the pipeline company announced a payout cut last year. KMI sells for a pretty unexciting 2.79 percent dividend yield at the time of writing, and there is no real path for appealing dividend growth in the near future. Kinder Morgan retains the option to hike its dividend payout, of course, if its balance sheet is stabilized, its credit rating protected, and cash flow strong enough to fund the company's investment budget, but a dividend increase is not an option for the company any time soon, certainly not in 2016. From an income investor perspective, I just think there are other high-yield investments in the bargain bin that offer more compelling total return potential in the next three to five years than Kinder Morgan.
Kinder Morgan is a great company, has a wide moat, and significant industry clout and earnings power over the long haul. That being said, though, other high-yield investments offer better reward-to-risk ratios, higher yield and income, and superior dividend visibility. Since Kinder Morgan has bounced back from its lows, I have decided to sell 1/3 of my position, and recycle the proceeds into other non-energy high-yield income investments.
Disclosure: I am/we are long KMI.
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.