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2019-11-11 22:01:15

Kinder Morgan (KMI) is one of the largest energy infrastructure companies in North America. The company owns an interest in or operates approximately 84,000 miles of pipelines and 157 terminals and has approximately 11,000 employees. Kinder Morgan has the largest natural gas pipeline in North America and currently moves about 40% of all-natural gas consumed in America. In the balance of this article, we'll look at the reasons I believe, at its current price, Kinder Morgan represents a relatively safe play in what seems to be an uncertain market.

IMAGE: KINDER MORGAN PIPELINE

Recession Coming?

Despite the Dow hitting a record high last week, there is plenty of talk of an imminent recession brewing. While no one can truly know if and when a recession will truly hit, we are certainly living in a tumultuous political time and there is plenty of speculation. In fact, a simple google search with the words recession and 2019 yielded 90 million hits with popular financial publications such as Bloomberg, Forbes, and Fortune Magazine leading the list. If, in fact, we do experience a recession or even a simple stock market pullback, dividend stocks with consistent cash flows and essential products and services generally weather the storm in a decent fashion. Whether we have a stock market retraction or not, Kinder Morgan is a stock that should not keep you up at night.

The Dividend

In 2015, Kinder Morgan cut its dividend by 75% in order to get its fiscal house in order. The market did not react kindly and the company's stock price sank from $34 to $12 in a matter of a couple of months.

Data by YCharts

KINDER MORGAN STOCK PRICE 2015-16

Fast forward to today, and while the stock has recovered some and now is dancing around the $20 mark, it would still take a 70% gain to get back to its $34 share price of 2015. While that is unlikely to happen soon, it is worth noting that the dividend, that was slashed in 2015 to the chagrin of shareholders, has more than doubled in the last few years and now yields a healthy 5%. Further, the most recent quarterly dividend represented a 25% YOY(Year-Over-Year) increase. Add to that the fact that the company hasn't accessed the capital markets for three years and long term debt is coming down and we have reason to believe the dividend is sustainable.

KINDER MORGAN DIVIDEND TRENDS

Another factor that can comfort potential investors is the fact that distributable cash flow is growing. The graphic below shows that cash flows have grown consistently over the past three years and the company currently is generating $5 billion in annual distributable cash flows.

IMAGE SOURCE: KINDER MORGAN INVESTOR'S PRESENTATION

Undervalued?

There are a lot of factors that go into determining if a stock is undervalued, some of them forward-looking and somewhat subjective. Without getting into subjective debates, there are two things we know for sure. First, we know, as shown in the chart below, that traditional valuation metrics show the stock to be at historically low levels. Second, management has made it clear that it believes its company's stock is undervalued.

KINDER MORGAN PRICE TO FREE CASH FLOW

With regard to management, we can start by noting that insider ownership at KMI is 13.45%, an unusually high percentage for a company with a $45 billion market cap. Further, two years ago, management authorized a buyback program, authorizing up to $2 billion in buybacks. Management continues to look at opportunistic times to buy back shares and currently sports a multi-year buyback ratio that is higher than 84% of its peers.

In the third-quarter conference call, CEO Richard Kinder was quick to point out that the company was receiving multiple offers for parts of Kinder Morgan at prices that were well above the price at which the stock is currently trading on the New York Stock Exchange. He not only noted the sales of the Cochin Pipeline and Kinder Morgan Canada, transactions that fetched 13 times EBITDA, but he also noted that the company had received multiple other offers at or above that price range. In other words, other companies in the industry value Kinder Morgan at a higher price than its current stock price would indicate.

Predictable Revenue Streams

Kinder Morgan is what many would call a boring company in that it is unlikely to significantly surprise investors either to the upside or downside. The company, in essence, acts like a giant toll road, whereby the company receives fees for its services. Many of Kinder Morgan's pipelines are backed by long-term contracts that specify minimum values and not only are almost all the pipelines under contract, there is also a significant backlog. There are not a lot of businesses with revenue streams that are more consistent than that.

Conclusion

I have owned a modest stake in Kinder Morgan for just under three years and the stock has essentially been stuck in the mud . Some may view that as a negative but I do not. Distributable cash flows have been growing and the valuation is becoming a little bit more friendly all the time. I believe the stock is moderately undervalued but even if that stock price does absolutely nothing, I am okay with sitting tight and collecting the five percent dividend. If the stock dips below $20 in the next couple of days, I will be adding to my position.

Disclosure: I am/we are long KMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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