On December 8th, 2015, Kinder Morgan stunned many in the dividend investing community when they cut their dividend from $0.51 to $0.125 per quarter. Much was written about KMI management's decision to cut their dividend in order to fund expansion projects with their internally generated cash flow instead of continuing to issue high cost debt and equity. The decision to cut their dividend also helped the firm maintain their investment grade debt ratings (BBB-/Stable and Baa3/Stable) by avoiding adding more debt to their already levered capital structure. The dividend cut led many income focused investors to sell their position in KMI. Although I considered parting ways with Kinder Morgan after their dividend cut announcement, I held onto my position in my RRSP. Below are some of the reasons why I continue to maintain my position in KMI.
1. Kinder Morgan's Assets
With 84,000 miles of pipelines, Kinder Morgan is the largest energy infrastructure company in North America. For a quick comparison, the next biggest firms, Enbridge and Williams Companies operate about 16,900 and 13,600 miles of pipelines respectively. In today's challenging regulatory environment, recreating a pipeline network anywhere near the size of KMI's would be impossible. As much as I hope that our society can move away from relying on fossil fuels, so long as a demand exists for those products, Kinder Morgan will play an important role in transporting them throughout North America. It is also worth noting that despite the difficult regulatory environment, Kinder has recently received authorization for the Elba Liquefaction Project, and recommended approval for its Trans Mountain expansion project.
2. Strong Cash Generation
Looking at Kinder's Q1 2016 results, it is evident that the company is still able to generate strong free cashflow. Despite revenue being down 12.5% in Q116 vs Q115, the company still generated cash from operations in excess of a billion dollars. The company's own "distributable cash flow" metric was $1.23B in Q116 marginally less than the $1.24B generated in Q115. These strong results helped the company increase their revolver size from $4B to $5B and negotiate a $1B unsecured term loan during Q116. This financing will help the company as it moves away from issuing equity for financing in 2016.
3. No Taxable Benefit from Selling
With my KMI shares inside my RRSP, there will not be a taxable capital loss carryforward that I would gain by selling my shares. Selling my shares in my RRSP would simply represent a loss of funds contributed to my RRSP that I would never be able to recoup. In contrast, had I held my Kinder Morgan shares in my taxable account (which would have been silly given the withholding tax on US dividends), I likely would have sold after the dividend cut announcement in December to lock in a capital loss I could carryforward indefinitely under Canadian tax law.
4. Avoiding the Point of Maximum Pessimism
I also felt that by selling my shares directly after the dividend cut announcement or early in 2016, I would have been selling at the point of maximum pessimism. Despite losing faith in Kinder Morgan's management (i.e. I will never put any faith in their management guidance again), I do believe that cutting the dividend was in the long-term best interests of the company, as fueling expansion with equity and debt capital costing over 10% would have been unsustainable and forced a restructuring. It should also be noted that the company's shares are already up almost 50% (including dividends) off their 2016 low of $12 per share in January.
5. Lack of Outstanding Ideas for Capital Redeployment
As might or might not be obvious from my monthly watch lists and screens covering various sectors, I am having a hard time deciding where to deploy fresh capital. Until a great opportunity presents itself to me, I have no issue collecting a ~3% dividend from Kinder Morgan especially given my expectation that their share price would benefit from a sustained rise in the price of crude oil. With KMI's management indicating that their 2016 forecasts were based on oil trading at an average of $38 for the year, the company's share price will likely increase if oil holds near its current ~$50 per barrel.
Beyond the five reasons outlined above, the fact that I have started to look at my portfolio from a total return perspective also explains why I have kept my shares in KMI. Expanding off my fourth reason above, from a consumer's point of view, I felt that $20/barrel of oil was too good to be true. As an investor, early in 2016, I decided that owning companies that would benefit from the inevitable mean reversion in oil prices would be beneficial to me. Since January/February, a number of my energy (i.e. TransCanada, Enbridge, Kinder, etc.) and non-energy (i.e. Canadian banks, REITs with exposure in Alberta, etc.) holdings have seen strong price appreciation. As much as I enjoy receiving dividends, it is ultimately the cumulative value of my investment holdings that will allow me to achieve financial independence.
Have you bought, sold, or held Kinder Morgan since their December 2015 dividend cut???