KMI Dip Means Huge Opportunity for Investors

by Aaron Levitt | December 4, 2013 2:38 pm

kinder[1]Sometimes the market moves in mysterious ways. One of those moves is happening now at pipeline kingpin Kinder Morgan (KMI[2]). Reminiscent of the recent fall caused by the negative Hedgeye analyst[3] report, shares of KMI have fallen about 6% at press time. And just like that report, today’s issue is another case of over-reaction.

In this case, we’re talking about the difference between what analysts expect[4] will happen and what KMI is planning on doing.

Unfortunately, even when a company is making money and returning that money to shareholders by raising dividends, bad things can still happen if the Street isn’t impressed. That’s what we are seeing today in KMI shares. However, for those investors looking to load up on the biggest and best pipeline firms on the block, today’s 6% fall could be the best opportunity in months.

All About Dividends

As one of the largest pipeline operators in the country, KMI has been a virtuoso at using the master limited partnership (MLP) structure[5] to its advantage. As we’ve stated before, MLPs offer plenty of high, tax-efficient dividends to their sponsoring firms as they “drop-down” assets into the corporate structure. In the case of KMI that also includes hefty incentive distribution rights (IDRs). Those IDRs are designed to reward KMI for growing its pipeline MLP assets.

So aside from its wholly owned energy logistics assets, KMI receives plenty of direct dividends and IDRs from El Paso Pipeline Partners (EPB[6]) and Kinder Morgan Energy Partners (KMP[7]). So if something goes wrong at one of these firms, it can affect KMI’s bottom line as well.

Which is sort of what’s going on.

In its latest guidance report[8], KMI and its MLPs reported dividend amounts that were less than expected. Mangers at EPB announced that they expect to pay $2.60 per share in dividends for 2014, while KMP will pay a hefty $5.58 per unit for 2014. Those payments will enable KMI to pay a dividend of $1.72 per share for fiscal year 2014. All of these amounts are increases versus what the company is paying in 2013.

But here’s the rub — all of these estimated payouts are less than the Thomson Reuters analyst consensus. In the case of EPB it’s about 8 cents less. So, despite growing its dividends across the board — KMP payout is now 6% higher — Wall Street wasn’t pleased, and investors began selling the shares in spades. Apparently, they’re angry enough to cause a 9% drop in EPB shares.

Time To Buy

For those investors with clearer heads and longer horizons, the recent drop in KMI, KMP and EPB could be huge buying opportunities. Keep in mind these are only estimates, and Kinder has a habit of beating estimates by a nice amount. This year alone, KMP shares have already paid out 5 cents more per share than it originally forecast in the beginning of 2013. So investors could actually be getting closer to what the analysts want anyway.

And they might get more than that.

As natural gas and oil production continues to surge in the U.S., midstream infrastructure spending and demand is heating up. With more than 82,000 miles worth of pipelines and gathering assets, KMI and crew are at the epicenter of that movement[9]. The firms all have numerous projects on the books that will help deliver strong cash flows back to unit and shareholders over the next few years. KMP has already managed to increase its cash flows by 22% for the first three quarters of the year, hitting more than $1.6 billion because of new projects and demand for its pipelines.

For investors, the recent drop in all three shares — along with Kinder Morgan Management LLC (KMR[10]) –- have put them all near their 52-week lows and at some of the highest dividend yields not seen in years. At these prices, you’re still getting strong dividend growth — about 5% for KMI — along with the chance to own the largest pipeline network in North America.

The bottom line? The market is handing investors a gift. Capitalize on it.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities. But he does plan on initiating a long position in KMI if prices continue to fall.

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  8. In its latest guidance report:
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