For some income investors, the gig is up in pipeline giant Kinder Morgan Inc (KMI). However, a quick look at the charts shows that traders can still use KMI stock as a means of income generation.
Obviously, word of Kinder Morgan’s 75% dividend cut from a payout of $2.04 per share of KMI stock down to 50 cents caught the attention of myself and any other investor with a market newsfeed.
More importantly, the tough but necessary decision to cut the dividend on Kinder Morgan stock was a smart, tactical one by management. Ultimately, the substantial reduction frees up necessary cash flow in an otherwise difficult situation.
In fact, the cut was sufficient for Standard & Poor’s to affirm KMI’s BBB- corporate credit rating and A-3 short-term credit rating.
Moreover, S&P noted the dividend adjustment to KMI stock “is credit positive and a prudent and necessary action taken by management in light of very challenging capital market conditions.”
KMI Weekly Stock Chart
This week’s action has resulted in the largest investor interest since its debut in 2011. The enormous volume has been mostly all underwater relative to last week’s low-water mark, but Wednesday’s gain of nearly 7% and complete unwind and reversal of the after-hours reaction suggests a technical washout is playing out in KMI stock.
This strategist also likes the fact Kinder Morgan shares have nearly completed a Fibonacci-inspired two-step move, or mirror move, where the dollar size of leg AB = leg CD.
For what it’s worth, a 100% completion of this pattern at $14 was for all intents and purposes confirmed in Tuesday’s after-hours when KMI stock was trading near $14.50 and possibly a bit lower, with an exact low unconfirmed.
Given the washout and a mostly confirmed two-step pattern in KMI stock, the expectation is for a bottoming process to begin.
Further, I’d expect the price action in KMI stock to be somewhat bumpy but confined to the $14 – $15 area for a low, and I’d also expect a likely cap on investor enthusiasm in the $18-$20 area into early 2016.
KMI Stock Trade Idea
Given an expected bottoming process and what we anticipate is a defined trading range in KMI stock, I like the idea of using a buy-write.
A KMI stock buy-write allows the trader to approach an otherwise bullish position more conservatively by looking to generate additional income and lowering the breakeven or stock’s purchase basis.
With shares trading modestly higher Thursday at $17.05, the Dec 31 $17 call for 95 cents mid-market — which yields a buy-write spread price of $16.15 — looks attractive given what’s been discussed.
The buy-write trader’s initial cost basis of $16.15 is 5.5% below the current KMI stock price of $17.05 and puts it closer to the outlined trading range lows than the range highs. If assigned, a 4.6% return on investment — for less than a three-week holding period — provides for decent income generation.
On the flipside, if KMI stock is below $17, the trader has done better than the bullish investor who is simply long shares and waiting for the reduced dividend payout. The trader also remains in position to roll and repeat — and likely will not even notice the dividend payout compared to this alternative and more attractive income stream.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
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