Kinder Morgan is not happy with its share price
Shares of Kinder Morgan (KMI 0.31%) languished for years. They are down 15% from the last five, even as Kinder Morgan’s earnings, cash flow and dividends are up while net debt has fallen. This lackluster performance did not go unnoticed by the company’s co-founder and executive chairman, Richard Kinder. He spoke on the company’s second-quarter conference call about his frustrations with how the market is valuing Kinder Morgan shares..
Here’s what he had to say about the company’s action and strategy to increase shareholder value.
Disconnection from reality
Richard Kinder started the call by discussing the company’s strategy and financial philosophy. He noted that the pipeline giant “makes a lot of money and uses it productively.” However, this is not “reflected in a higher price per KMI share”. He further stated, “Market pricing has become disconnected from midstream energy sector fundamentals, resulting in a KMI dividend yield approaching 7%, which seems paltry for a company with Kinder Morgan’s stable assets and solid dividend coverage.”
This dividend yield is one of the highest in the S&P500. Meanwhile, the company offers a free cash flow yield of over 8%, which puts it in the 84th percentile of S&P 500 companies. These factors suggest the stock price is dirty cheap.
Unfortunately, Kinder “does not have an answer to this disconnect”. He said: “It is easy to blame factors over which we have no control, such as the mistaken belief that energy companies have no future or the volatility of crude prices, which in fact have a relatively small impact on our financial performance.” While these factors are likely weighing on the stock, investors seem to prefer companies with outsized growth prospects over those that offer stability and income. This is evident in some of the bleeding valuations of many tech stocks before their steep declines over the past few months.
What Kinder Morgan plans to do about the disconnect
Kinder’s comments led an analyst on the call to ask if there were any specific actions the company was considering that could positively impact its stock price. Kinder responded by saying, “Well, I learned a long time ago that the ability of management teams to influence the price of action is quite remote.” Furthermore, he noted that this is not a problem specific to Kinder Morgan, as valuations are falling in the midstream sector.
For this reason, instead of doing anything to address the disconnect, Kinder Morgan plans to focus on what it does best: generating and deploying liquidity. The company plans to continue paying an attractive dividend which it wants to continue to grow. It also plans to invest in expansion projects and acquisitions that meet its strict performance criteria. Finally, it will buy back shares when they make sense.
The company has already secured a few new high-yield expansion projects this year. On top of that, it recently struck a deal to boost its renewable natural gas business. These investments will help increase its cash flow in the future, giving it more money to deploy on behalf of shareholders. Meanwhile, the company has already repurchased 16.1 million shares this year. The savings on the current dividend alone is 6.5%, giving investors a good return on these redemptions.
“So that’s our game plan,” Kinder said, “pretty simple and not really very imaginative. But I think in the long run maybe we’re tortoise against hare…I think we are being rewarded for the kind of performance we’ve produced now, quarter after quarter after quarter.”
In other words, the company plans to continue doing what it does. He believes that over time, the market will begin to place a higher value on its stable cash flows and its ability to deploy those cash flows wisely on behalf of investors.
That may not be what some investors want to hear. Some might prefer the company to make a big change, while others might want it to become even more conservative. To these investors, Kinder joked, “To paraphrase Abe Lincoln, I know we can’t please all of you all the time.”
Slow and steady
While Kinder Morgan’s management team would like to see its shares trading at a higher price – management and the board own 13% of the company’s outstanding shares – they won’t do anything different to try to fix it. increase the stock price. Instead, they plan to stick with the current strategy of generating and deploying cash, as they believe it will increase shareholder value over time. In the meantime, investors are being paid well while they wait, given the company’s high-yielding dividend. This makes the company best suited for investors looking for a sustainable passive income stream.