Well, 1-for-2 isn’t bad.
In the second round of Stock Market Madness, I picked pipeline juggernaut Kinder Morgan Inc. (NYSE:KMI) over oil major Exxon Mobil Corporation (NYSE:XOM). It was a tough call, as I consider both stocks to be fine buy-and-hold dividend champions. But readers seemed to agree: Kinder Morgan took 369 votes to Exxon’s 234.
Unfortunately, I shot an airball with my recommendation of Ford Motor Company (NYSE:F) over Walt Disney Co (NYSE:DIS). I still consider Ford the better pick for now, but readers disagreed. Disney took 475 votes while Ford managed just 133. The contrarian in me is tempted to call such a lopsided win a contrarian sign, but then, I have often been accused of being a sore loser.
So, in the quarterfinals we have KMI taking on DIS. These are two stocks that are both very popular with readers and with good reason. Both have had fantastic runs of late … but only one stock can advance to the next round.
Let’s dig into both stocks now.
Kinder Morgan (KMI)
We’ll start with Kinder Morgan. I’ve made no secret of my enthusiasm for this stock over the last year. It has everything I look for in a good stock. It’s on the right side of at least one durable macro trend, it’s reasonably priced, it’s massively shareholder friendly, and company insiders are pouring millions of their own dollars into the stock. There’s not much to dislike here.
You might be wondering what I mean when I say that Kinder Morgan is on the right side of a major macro trend. After all, crude oil is still in free fall, and America’s domestic production boom would seem at risk.
Well, I agree, actually. In the short-term, America’s onshore drilling industry really is at risk. I expect a lot of drillers to go belly up before all is said and done. But this is actually an opportunity for the blue chips like KMI.
Earlier this year, Kinder bought $3 billion in quality pipeline assets from a cash-strapped Harold Hamm. (You probably recognize the name. He’s the founder of shale pioneer Continental Resources (NYSE:CLR) and party to an now infamous billion-dollar divorce.) I expect to see a lot more deals like these from motivated sellers.
When the global economy picks up again, so will the price of crude oil … and so will American onshore production. And leaders like Kinder Morgan will have the assets in place to move their oil and gas where it needs to be.
Meanwhile, KMI is reasonably cheap, sports a dividend yield of 4.4% and is a champion of shareholder friendliness. Kinder Morgan has been a serial dividend raiser, and indicated late last year that it expected to see dividend growth of at least 10% per year over the next five years.
But the kicker is Kinder Morgan’s insider buying. CEO Richard Kinder just dumped nearly $4 million into KMI stock … which sounds pretty good. It sounds even better when you consider he’s bought nearly $100 million in KMI shares over the past two years.
I like CEOs with skin in the game, and it’s safe to say that Mr. Kinder has more skin in the game than almost any CEO of a company this size.
Walt Disney (DIS)
But in Disney, Kinder Morgan has a worthy rival. Disney is an iconic company with perhaps the best brand of any company in the world. I’d put Mickey Mouse up against The Coca-Cola Co (NYSE:KO) or even the major beer companies in that respect. Disney’s franchises were a century in the making, and the company has some of the deepest and widest competitive moats you can find.
It’s also a wildly profitable company, and Disney’s earnings and revenues per share are sitting at all-time highs. Disney may well enjoy the best summer in its history if the Avengers sequel is as big a hit at the box office as expected.
But as I mentioned in the first-round article, Disney is not primarily a movie studio or a theme park operator. It is first and foremost a TV studio. Its media division — which includes broadcast giant ABC and cable sports juggernaut ESPN among others — accounts for close to half of revenues in any given year.
This is a major strategic risk, as Apple Inc. (NASDAQ:AAPL) and Dish Network Corp (NASDAQ:DISH) are potentially upending the current cable TV regime with their streaming content options. Frankly, I don’t know how this will end. Disney and the other major content owners might end up stronger than ever. But revolutions often take on a life of their own, and there is just too much uncertainty.
However, if you look at Disney’s current valuation, investors seem oblivious to these risks. Disney’s stock is very expensive at a cyclically adjusted price earnings ratio of 35.
Our Quarterfinal Pick: KMI
My choice to move on to the final four is Kinder Morgan. I expect Kinder Morgan to give Disney a serious run for the money in 2015, but I also expect it to be the better — and safer — buy-and-hold option.
If the market were to close for the next decade and you were stuck holding whatever stocks you own today, you’d be in good shape holding Kinder Morgan.
Head back to the Stock Market Madness bracket to vote for your favorite stocks and check out other previews!
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long KMI. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
