Kinder Morgan Dividend Cut

Kinder Morgan Inc (KMI) announced a 2016 outlook for the company and with that, announced a dividend cut in order to get the cash flow under control. The dividend distribution amount for 2016 is $0.50, down from an annual rate of $2.04, which results in a 75.5% cut. I shared my thoughts on Kinder Morgan yesterday in this article here. The forward yield going forward is 3.18%.

From the press release:

  • DCF per share growing as businesses expected to generate slightly over $5 billion of cash in 2016
  • KMI expects to declare dividends of $.50 per share for 2016 and use excess cash to fund growth investments
  • No need to access equity markets for the foreseeable future
  • KMI to take required action to maintain investment grade rating

Kinder Morgan, Inc. (NYSE: KMI) today announced that its Board of Directors has approved a plan pursuant to which it expects to pay quarterly dividends of $.125 per share to its common stockholders ($.50 annually), down from its current quarterly level of $.51, beginning with the fourth quarter 2015 dividend payable in February 2016. This dividend enables the company to use a significant portion of its large cash flow to fund the equity portion of its expansion capital requirements, eliminate any need to access the equity market for the foreseeable future and maintain a solid investment grade credit rating. KMI anticipates enough retained internally generated cash flow to fund all of the required equity contribution projected for 2016 and a significant portion of its debt requirements. The company has reviewed its expected investments in 2017 and 2018 and believes that its stable and growing internally generated cash flow will allow it to continue to fund the equity portion of its capital budget without the need to access the equity market. It anticipates meeting all of the rating agencies’ requirements to remain investment grade, and expects a net debt/EBITDA ratio of 5.5 for 2016 and anticipates reducing that ratio in subsequent years.

“We evaluated numerous options, including significant asset sales, but ultimately concluded that these other options were uneconomic to our investors in the long run. This decision was not made lightly, but we believe it is in the best interests of the company, its shareholders and employees,” said Rich Kinder, executive chairman of the KMI board. “It will allow us to continue to maintain and grow our outstanding set of midstream energy assets without being required to issue equity at valuations prevalent in today’s market while maintaining a solid investment grade rating on our debt obligations. We are directly addressing concerns about our investment grade rating and concerns about the need to issue additional equity. We believe today’s action is beneficial to our shareholders.”

“Our strategy always has been, and will continue to be, to focus on fee-based midstream energy assets that are core to North American energy markets,” said Steve Kean, president and CEO. “Our execution of that strategy has enabled us to grow distributable cash flow (DCF) per share and we believe we will continue to do so.”

The company has completed its budget process for 2016 and expects DCF available to its equity holders of slightly over $5 billion, an increase of approximately 8 percent over 2015. “We grew our DCF per share in 2015 and we expect to grow again in 2016, despite a very difficult environment in the energy sector. We believe we have the best set of assets in the midstream energy business and the cash generated by those assets is fee based and growing. Today’s action is not a reflection of our underlying business – our business is strong and growing. Today’s decision is about finding the most economic way to fund our set of attractive return expansion projects,” said Kean.

Please join Kinder Morgan at 8:30 a.m. Eastern Time on Wednesday, Dec. 9, at http://ir.kindermorgan.com/presentations-webcasts for a LIVE webcast conference call on this announcement.

Kinder Morgan, Inc. (NYSE: KMI) is the largest energy infrastructure company in North America. It owns an interest in or operates approximately 84,000 miles of pipelines and approximately 165 terminals. The company’s pipelines transport natural gas, gasoline, crude oil, CO2 and other products, and its terminals store petroleum products and chemicals, and handle bulk materials like coal and petroleum coke. For more information please visitwww.kindermorgan.com.

This is the first dividend cut in my portfolio and reduces my annual dividends (from the 106 shares) from $216.24 to $53.00, a cut of $163.24 🙁

30 thoughts on “Kinder Morgan Dividend Cut

      • Yup, be grateful for that. I hold KMI as well. I’m going to go out on a limb and say it’s extremely oversold due to panic. I will sell at some point because it’s how I handle these situations, but I don’t think it’s quite time, some people are going to jump in on the red light special pricing and give it a little boost.

        • Looks like we are getting that jump that was expected from the cut and the rating change outlook from Moodys. Its a good value play right now – with trading price at less than 7 times distributable cash flow.

          R2R

    • Yup, its a big cut alright. I dont think I will sell…although I have considered it seriously. Most of the pain is behind us and I will have to sleep on it. Sorry to hear that you own 350 shares – thats a big cut indeed.

      R2R

    • Yup…investors are not happy. Last year, investors were forced to pay taxes because of the merger and corporate structure change – and this year, this. Management is playing loose and erratic. I might consider selling in the future – but will hold for now.

      R2R

  1. I can’t put my finger on it, but I never put KMI in our portfolio because it just didn’t feel right. Makes me glad that I had that feeling. Major capital losses combined with a major dividend cut. How depressing. No matter what Kinder does in the future, it’s going to be looked upon with suspicion by many investors.

    • Good call there, Dividend Gravy. Management sure played erratically and now everyone pays for the yahoos running the place. I think you are right – investors will have a hard time trusting management after moves like these.

      R2R

  2. That was a bit more than anyone expected, but that’s okay. This is a company that’s been raising that dividend every chance they get, so you know they are going to try to get things back to where they were within the next couple years, I imagine.

    Don’t be too focused on today’s dividend. Keep tomorrow’s dividend in sight instead. I’m averaging down now at these incredible prices because I know that, within the next few years, the yield on cost is going to be phenomenal.

    Even if oil prices don’t go back up to $100/share (it likely will never go to such record highs again), KMI is a company that will bounce back as commodity prices stabilize. But right now there’s enough blood on the streets to label this a genocide. Time to buy.

    Sincerely,
    ARB–Angry Retail Banker

  3. It will only reduce my annual dividends by $25 so I will hold. As you say, the majority of the damage is done. I guess the good news is that they appear to be taking their debt and situation seriously and making drastic moves. Let’s hope they continue to make moves that reduce the debt and start building a solid company again.

  4. R2R,

    I’m right there with you. If I were on the outside looking in, I’d be pretty excited about the opportunity to snag KMI in the mid-teens. Alas, I loaded up already. But that’s why we diversify. Even if a business is solid at its core, human error can really screw things up.

    It’s a real shame, because this whole situation could have been avoided, in my view. Handing out pre-crisis dividend raises only to cut the total payout by 75% shortly thereafter shows a lack of vision on the part of management. I guess they thought they were never going to have an issue with their cost of capital, but that’s the way it goes when you play it that tight. I’m hopeful they right the ship fairly quickly and get back on the right track. The assets are still world-class, that gas is still flowing, and they’re still producing gobs of cash flow. Just not enough cash flow to aggressively do everything at once. We’ll see how it goes!

    Cheers.

    • Hi Jason,
      Good to hear from you. The assets are great and as you said, world-class. We are not getting off of oil and gas anytime soon and Kinder Morgan plays an absolutely critical role in N.America. The management should have been more prudent, but they kept raising dividends after the oil prices fell. Its been a year since the prices crashed, and reality has finally caught up to them now. I wonder if they thought that this was a small blip and oil would bounce back and kept pushing ahead. Terrible decisions all in all. I will be holding for now, but management will have to work hard to gain my trust back.

      R2R

  5. Personne n’aime voir son flux de trésorerie descendre mais le secteur du pétrole n,a pas fini sa descente et que peut importe le nom de la compagnie , secteur très volatile et surtout que l’OPEP n,a pas voulu couper sa production ,,,donc les 6 prochains vont être douloureux pour certaines personnes …..Les cies n’auront pas le choix de couper ou diminuer comme l’ont fait KMI

    Comme ARB mentionne :

    Ne pas être trop focalisé sur le dividende d’aujourd’hui. Gardez le dividende de demain en vue à la place

    Bonne journée

    • Well said, Gaston. Its time to look ahead and focus on whats to come.

      From what it looks like, oil is going to stay low for years to come. Maybe we hit peak oil already? I am writing another article about the changing landscape of the energy space that should be up tomorrow. Interesting times.

      Thanks for stopping by and commenting

      Bonne journée
      R2R

  6. Well you called it when we were talking last week R2R. Bravo! The real tell for me, is if Richard Kinder buys a bunch of shares (like $5,000,000 worth) on the open market. Time will tell, but this move reduces my already low thoughts on the company’s management.

    Hope your week is going well
    -Bryan

    • Haha thanks for the wishes, Bryan. Unfortunately, it was a hollow call. The writing was on the wall and it was pretty obvious that the market was pricing-in a cut.

      Its my first dividend cut – so, this week kinda sucks…but I’ll chalk it up as a learning experience.
      R2R

  7. Yikes, That’s too bad. I wonder whether our Canadian counter parts are doing ok. I have some TRP and TRP isn’t doing any better. Its freecash flow isn’t at the sustainable level. We will see!

    BSR

    • I was surprised to see ENB also raise dividends recently and give a strong guideline – but I think they may have a better structure as they did a dropdown to ENF last year, but I am not intimately familiar with TRP and ENB.

      I continue to hold for now. Thanks for stopping by
      R2R

  8. Definitely will be interesting to see what many in the DGI community decide to do going forward in terms of selling out or keeping their holdings. I have experienced my own dividend cuts in 2009 with WFC, GE and IR. What did I do? Kept them all and added more at better valuations. I guess a cut was inevitable but I am a little surprised at how deep this one came in.

    • Thats what Im thinking too, DivHut. Now is the not the time to sell. If anything, now is the time to buy, but just a matter of figuring out if I want to go even heavier on energy than I already am. The cash flow from the company is great – and the drastic steps taken should right things in the future.

      Thanks for stopping by and sharing
      R2R

  9. My first dividend cut as well. Dropped from annual dividends of $363 to $89. Ouch! It’s held in a Roth so unfortunately can’t sell for a tax-loss. I can’t easily access the money in the Roth for over 30 years so at this point I’ll just hold onto it and reinvest the dividends. It might take awhile, but things will work out!

    • It is a big cut, Scott. But the infrastructure business is good in the sense you can “set it and forget it” The underlying business hasnt changed – and the cash flow will continue over the years. Stay patient.

      cheers
      R2R

  10. viniliam says:

    I was very imprudent to start a big position when the stock was about 22 dolars. I can not trust the management nor do I feel comfortable, so I sold with a big loss (+2000 dolars), hoping to invest in something more stable. I might buy back a much smaller position if it goes down under 10 $

    • Yeah its been quite a ride, but I think the worst is behind and now is the time to buy if anything. I am considering adding but for now, am just planning to hold. I dont trust the management, but like the infrastructure and the business model they have.

      R2R

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