12-09-2015, 12:31 AM
(12-08-2015, 11:52 PM)navyasw02 Wrote:(12-08-2015, 05:16 PM)EricL Wrote: Dividend cut sucks, but in the long run is the best choice of action for the company and for shareholders.
Frees up $3.37B ($1.51x2.23B shares) in annual cash flows which it can use to fund growth projects and pay down debt. This allows the company to maintain its investment grade credit rating while also avoiding selling off assets at distressed prices to meet cash flow needs.
Could be a tremendous buy if it drops much further. At a $15 share price it would trade at just 6.7 times the forecast DCF of $5B and would also yield 3.3%, which I would expect to see a return to growth in the future once the balance sheet is cleaned up.
The business remains the same as it was at $40 earlier this year and is producing plenty of cash flow. The company simply got ahead of itself with dividend payments and their high leverage caught up to them.
At 3.3% yield, what would be the point? People only liked it because it was a dividend cash cow. Why not go with XOM at about 4% yield and a AAA rating and save the heartache?
Because this is a temporary event, and KMI remains a cash cow, just not a high yield one at the moment. An investor who buys tomorrow (likely under $15), will be paying less than 7 times distributable cash flow for the company. For example, with a $15 share price you'd be paying 6.7x DCF ($15*2.23B shares / $5B). The KMI business itself hasn't changed since yesterday, just the income yield it is giving to shareholders at the moment.
Looking strictly at income, you are right that XOM is a much easier stock to hold and at a AAA credit rating, is about the only SWAN stock in the sector at the moment. However, there are more to returns than income alone, and for value investors who are looking for potential long term capital gains, I think there is a pretty good chance of seeing those in the future with KMI.
KMI is doing what it needs to do to fund the growth capex it feels necessary for the long-term benefit of the business. Due to the drop in share price it can't sell shares to raise funds, and due to its high debt load and falling equity it can't float any more debt to fund projects without getting a credit downgrade that would drop it below investment grade. Again, this 75% dividend cut will free up roughly $3.4 billion in cash flow that was previously going to the dividend to now instead go towards capex and paying down debt. Once the balance sheet gets shored up and crude prices recover I expect the dividend growth to continue.