Why I bought KMI last week, and why I might add some more this week.

Ok, sooner or later I am going to write about our investments.  We have a little bit of diversification between some Vangard funds, some actively managed mutual funds and some individual stocks.

In addition we have about 25% or so of our two largest accounts in cash.

What I like about KMI 

I have owned some form of Kinder Morgan stock for several years now.  I have a core position, but have occasionally traded around it.

KMI is a great company, It was built in part by Rich Kinder, arguably the greatest pipeline guy in history.

Rich Kinder has stepped up into an Executive chairman role, but the remaining management has been stable and they have a reputation for being an effective management team.

The company specializes in the owning and operation of Natural gas, CO2, crude oil, and product pipelines, gathering facilities, and they have other investments including some Jones act ships for domestic crude oil transportation.

KMI gets most of its money from its pipeline business and most pipeline contracts are ‘take or pay’.  Shippers contract for space on a pipeline.  Afterwards they pay KMI whether or not the product actually is shipped.  So the recent drop in Crude prices generally have a relatively small effect on KMI’s earnings.

KMI has a 49.6 PE ratio, a current dividend of $1.96 and a 5.67% dividend yield.  KMI is a regular corporation, they just rolled out of a very complicated LLC structure back into a normal corporate structure. about a year ago  The big advantage is that they have the ability to buy back stock, or to actually retain earnings unlike LLC’s.  They dont have to issue additional stock in order to grow.

Pipelines have a ton of depreciation, they are cash machines but wont ever have great earnings, so really they way to look at them is for their cash flow, their project backlog and their dividend.  I would encourage you to read KMI’s description of backlog, cash flows etc.

They are a complicated company with a lot of moving pieces but the biggest thing I see when reading their transcripts is that they are committed to paying $2.00 in dividends this year, and are on the record as wanting to grow that dividend 10% a year thru 2020.  If I have done the calculation correctly, that would put the dividend at $3.22/share or a 9.24% yield 5 years out.

So why is down from $44.71/share to $34.85?

Well a couple of things,

1) KMI trades in many ETF’s as an energy company.  So as crude oil prices went down, KMI went with them.  I think the market is oversold as KMI has less exposure to energy prices than other companies in its sector.

2) KMI also trades as a bond equivalent, because bond yields have been so low, people have bought KMI as a substitute.  Many people sold KMI with the expectation that the Fed would hike interest rates. It looks now as though the fed hikes will be later and slower than expected.  So you may see a return to dividend stocks in the second half of the year.

3) People are assuming that the low costs of natural gas and crude oil will slow down the availability of growth in the future.  I think this is true true to some extent but overblown.  The reality is during the boom in energy production, a ton of oil was shipped via train.  Its a lot cheaper and safer to transport it via pipeline. So I would expect that new pipelines will still be needed even if production goes down as producers move from rail to pipelines to cut costs.

Also even though the price of natural gas is really low, demand is high.  As a nation we are closing coal fired power plants at an unprecedented rate.  In large part that load is being replaced by natural gas power generation.  So it is very clear that demand for natural gas pipelines will continue to grow much faster than the economy as a whole.  This should provide additional opportunities for KMI in the future.

4) According to CNBC there may be some hedge funds trying to put a bear raid on a large fund with heavy exposure to pipelines.  Williams, ETP and KMI all have been selling off like their house is on fire.  The selling might not be completely done, but its got to be getting close.

Why now?

OK…so bought some additional shares of KMI late last week at $35.15, and I am going to try and get some more if it stays here or goes lower this week.  There seemed to be some signs of capitulation as KMI really moved down a lot.

I am looking at KMI over other pipelines because I am going to use funds in a retirement account (there are some issues with the way the IRS treats LLC’s that are held in tax favored vehicles like 401K’s and IRA’s).

Rich Kinder filed that he bought $3M+ of additional shares in the open market, and yes while its a really small portion of his wealth, Rich does have a pretty good track record of buying low.

The commentators on CNBC suggested they think the hedge fund forced pipeline sell-off has to be nearing completion.  This is the catalyst that creates imo a really good buying opportunity.

If I am wrong, this stock goes down a couple of more dollars at most.  Its already down 22% from its 52 week high.  I dont see much if any more downside left in this stock.  And you are being paid to wait with a dividend that should go up a lot over the next few years.

Like to hear your thoughts.

7/27 Update.

Was unable to buy more on Monday. A good sign was that KMI was up in a down market. I still think it is a good buy, but since we added to our position last week and the market is behaving badly, I will wait a little.  If the price comes down, I will add to our position.  If not, we will just stand pat with what we have.  IF we didnt already own a fair amount  (for us) of KMI, I would be a buyer here.

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