KMI Earnings: Dividend Troubles on the Horizon?

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KMI - KMI Earnings: Dividend Troubles on the Horizon?

Source: Kinder Morgan

There are a lot of unhappy dividend investors this morning, myself included. Pipeline juggernaut Kinder Morgan Inc (KMI) — one of the most shareholder-friendly companies in the world — slightly revised its dividend outlook in its third-quarter earnings release, sending KMI stock down sharply this morning.

Kinder Morgan said that it would likely raise its dividend by 6%-10% next year, which by itself isn’t bad news. But, it comes after a 2015 in which the company boosted its dividend by a full 15%, and it raises questions about the reliability of management’s forecast of 10% annual dividend growth through 2020.

Let’s jump into the numbers, starting with the good news first. KMI actually beat analyst estimates, earning 19 cents per share vs. the consensus estimate of 18 cents. Revenue was roughly in line with estimates. In a move that KMI stock investors have come to expect as a birthright, Kinder Morgan raised its dividend to 51 cents per share. That’s a 16% hike over last year and a 4% rise over just last quarter. This was KMI’s 15th dividend hike since it went public in 2011, a truly fantastic run and a shining example of putting the shareholder first.

KMI-Stock

Unfortunately, none of that mattered to investors this morning. Instead, we’ve all been fixated on one line from Chairman Richard Kinder: “We currently expect to increase our declared dividend for 2016 by 6% to 10% over the 2015 declared dividend of $2.00 per share. We expect this range will provide the flexibility for us to meet our dividend and have excess cash coverage.”

Hold the phone. For the past year, KMI has been consistently telling shareholders that it is on track for annual dividend growth of 10% per year, or more, through 2020. This suddenly casts doubt on that forecast.

To be sure, it wouldn’t bust the forecast if a single year came in lower than 10%. The average over the next four years could still easily top 10%, and I expect that it will. But, if there is anything the market hates, it is uncertainty. And Kinder Morgan just inserted uncertainty where there was none before.

Looking at the bigger picture, KMI’s decision to lower expectations isn’t such a bad idea. Given how low the KMI stock price has fallen this year (along with that of every other pipeline company), Kinder Morgan doesn’t want to depend on the equity markets for expansion capital. Issuing new shares at today’s low prices would massively destroy shareholder value, and Kinder Morgan is not that kind of company.

Furthermore, Kinder Morgan already carries a lot of debt. That’s normal and completely reasonable for a capital-intensive pipeline business. But, as Richard Kinder pointed out in his comments, it would be detrimental to sharesholders if KMI had its credit rating lowered, as that would increase borrowing costs.

So, retaining a little more cash than usual is the prudent (albeit irritating) thing to do.

Looking forward, there is every reason to believe that KMI will catch up in its growth plans. The company has a $21.3 billion project backlog with a “high certainty of completion,” in management’s words.

I normally take management comments like that with an enormous grain of salt. But, given that this is Kinder Morgan, I’m willing to give the benefit of the doubt. Richard Kinder has proven to be one of the real “good guys” out there, reinvesting tens of millions of dollars of his own money into the company he founded. 2016 may be a sluggish year for KMI, but considering the stock currently pays a 6.5% dividend, we’re getting paid well to wait it out.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. He is currently long KMI.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/kinder-morgan-kmi-stock-earnings/.

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