Buh-Bye, Kinder Morgan
Summary
- After a long, somewhat tortured relationship, I finally have sent Kinder Morgan packing.
- It had gotten difficult to defend KMI as a viable holding within my DGI portfolio.
- For 5 years now, KMI has been a loser in both total return and dividend growth.
Time for me to practice what I preach: See ya, Kinder Morgan (NYSE:KMI) - I wish I could say it’s been great knowing you.
Last week, in advance of KMI’s quarterly earnings presentation, I strongly urged prospective investors to ignore hype about a projected 25% dividend raise. My point was that folks should buy shares only if they believe the company’s long-term prognosis is excellent - in other words, for the same reason any investor should acquire a stake in any business.
In the comment stream, many readers confidently predicted that KMI would follow through with its 25% dividend hike. Alas, they were wrong, as the company declared only a 5% increase. So, for the second time in 4½ years, Kinder over-promised and under-delivered. At least this time - unlike in 2015 - there wasn’t a 75% dividend cut.
Some commenters expressed anger at having been “kindered” again. Meanwhile, many KMI-loving shareholders made excuses for Chairman Richard Kinder and his management team.
How could they possibly have foreseen a global pandemic? ... They never really “promised” a 25% raise; they merely had “issued dividend guidance” or “made projections.” ... They’re not the only company ever to have done this. ... They still raised the dividend 5% during a pandemic, even as many companies have cut or eliminated dividends. ... Etc., etc., etc.
As I responded to those folks, I realized that I had even less use for Kinder in my portfolio than I had thought. Simply, I felt I could do better. So rather than just keep stating my case, I did something about it.
As you can see by the above executed order, I liquidated what was left of my KMI position on Friday, May 1. Thus ended my long, and somewhat tortured, history as a Kinder Morgan shareholder.
KMI and Me
Back in 2012, shortly after choosing Dividend Growth Investing as my primary strategy, I started buying stock in both KMI and Kinder Morgan Management; the latter, which used the symbol KMR, ran the operations and business affairs of the group's MLP, Kinder Morgan Energy Partners (which traded as KMP).
I liked the income that KMI and KMR kicked out, and I liked the oft-repeated thesis that no matter what was happening in the oil and natural gas industries, Kinder's "tollbooth" pipeline business would keep the profits rolling in.
Back then, KMI was a very popular choice for DGI types like me. The company even was selected by 6 of the 10 panelists who teamed in 2014 to pick the components of what would go on to be my real-money Dividend Growth 50 project.
Also in 2014, Kinder went through a major corporate restructuring, eliminating both KMR and KMP. Investors in those entities received additional KMI shares.
That activity resulted in KMI becoming by far my largest income producer. Given its rising debt level and its barely investment-grade credit rating, I wrote in July 2015 that I was concerned about its suddenly oversized role in my portfolio. A month later, after much consternation, I sold about half my position at $33.95 per share.
2015 was a rough year for the oil patch, and even though KMI Chairman Richard Kinder had promised annual 10% dividend hikes through the end of the decade, he failed to deliver. Worse than that, KMI actually hacked 75% off its payout ... and the phrase, "I've been kindered!" was born.
Fast-forward to more recent times. In 2017, KMI committed to raising its dividend again: by 60% in 2018, and by 25% in each of 2019 and 2020. The stock price, which had fallen from about $45 to $12 in just a few months' time, rebounded into the low-$20s.
So while the total return of my remaining KMI stake remained well underwater and the dividend still had not returned to anywhere near its pre-cut heights, I at least felt things were going in the right direction.
Then came the pandemic, and then came more oil-market turmoil, and then came a 50% stock-price plunge, and then came the failure to deliver the projected 25% dividend raise. And then came me trying to justify to myself why I was keeping this barking dog in my portfolio.
So on May 1, I finally shouted, "Mayday! Mayday!" ... and put that dog out of my misery.
Beyond the sheer emotions of booting a company that has been a loser in both total return and income growth, there were plenty of non-emotional facts behind the decision: too much debt (even though they've been working at bringing it down); a credit rating (BBB) that falls below my comfort level; mediocre scores from Value Line for both financial strength (B) and safety (3); a cyclical company whose price has been hit hard by oil-industry woes.
This "Financial Sonar" from Jefferson Research certainly wasn't comforting:
And as the following graphic from Simply Safe Dividends shows, Kinder's distributable cash flow and sales figures have been lagging for years (red circles), and the prospects for future DCF growth don't appear especially promising (blue circle).
KMI and the DG50
For all my talk about liquidating my Kinder Morgan position, the fact is that I actually still own 16.04 shares within the Dividend Growth 50, whose rules prohibit selling.
When I funded that project back on Dec. 16, 2014, I bought 13 shares of KMI for the DG50 at $38.87 apiece. Sadly, that $505.31 investment now has a paper value of just $233.54 - and that 54% decline is even with dividends having been reinvested. Only General Electric (GE) has had a worse total return among the portfolio's holdings.
That the DG50 has experienced impressive income growth and total return despite the presence of laggards such as KMI and GE underscores the importance of diversification. It also illustrates how investors can thrive even if a few of their investments turn out to be clunkers.
Conclusion
As an investor with a goal of building a reliable, predictable and growing income stream, I finally have decided that Kinder Morgan doesn't have a place in my DGI portfolio.
Some will say, "It's about time, Mike." Others will respond, "You're crazy, man."
Hey, I did not write this article to convince folks to dump KMI. My long-time readers know that's not my style. I like to explain what I do and why I'm doing it, and then I leave it up to my fellow investors to do what they feel works best for them.
As for the $7,842.62 I received for selling KMI ... I used those proceeds to buy shares in another company. I could reveal the name of that stock here, but what fun would that be?
I'm saving that for my next article, which will be published later this week. I know ... I know ... y'all are tingling with anticipation!
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
I do still own very small KMI and GE positions within the DG50 portfolio.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (568)
Kinder me once shame on you. Kinder me twice shame on me. Why invest in a company that devours its own investors?
@Mozman, Mike & others:
I was Kindered in 2014 when he merged KMP, his MLP, back into KMI with a taxable exchange that caused an unexpected 290K income increase that year. I sold my 3000 shares prior to the merger at $97.73, which I had bought in 2008-2009 at an average of $52.65, but the cost basis was nearly zero because of distributions. Yes, I made a nice profit, but that was not my plan. I had planned to keep KMP and receive its income until it became part of my estate and passed to my children. I eliminated all MLPs from my portfolio by the end of 2015. My portfolio now consists of all CEFs.
I finally decided to break off my relationship with oil altogether. I've held oil sticks since the Kodiak days, though that's not an extremely long time ago, a decade of underperformance is long enough.
@Raiderjkwong I'm with you. I hold EPD and MMP. As long as they crank our their 'collective' 9% tax deferred distribution I'm good. That's equal to a taxed return of 11% and there's a role for that in my portfolio.
I can understand the frustrations for those who were "Kinder-ed" five years ago. But buying high and selling low, before the full recovery of the midstream pipeline sector, does not make sense to me. The depth and breadth of the quality of the Kinder equity is beyond refute. What many may have missed is the dividend growth over the past five years of 16%. The past year, even with the Covid black swan was a healthy 5%. Better days are ahead for this heavily moated pipeline company, and selling out now may be something one looks back on and regrets.
Don't fall in love with them cuz they can't/won't love U back.
