While I didn't own any shares in KMI, the recent 75% dividend cut made me think of where my portfolio is vulnerable.
My conclusion was that KMI relied heavily on borrowing due to its very high free cash flow payout ratio. The BBB- credit rating then made the company financial balance vulnerable to a potential credit rating reduction.
I have changed my investment policy in two respects:
First, shares will not be bought of a company with less than a BBB credit rating.
Second, a free cash flow payout ratio of more than 80% will not be allowed. I have been more lenient with REITs than common stock due to the law requiring distribution of 90% of earnings. 80% is the payout ratio of Reality Income, which is well run to maximize shareholder return, so I use them as the benchmark for REITs.
My conclusion was that KMI relied heavily on borrowing due to its very high free cash flow payout ratio. The BBB- credit rating then made the company financial balance vulnerable to a potential credit rating reduction.
I have changed my investment policy in two respects:
First, shares will not be bought of a company with less than a BBB credit rating.
Second, a free cash flow payout ratio of more than 80% will not be allowed. I have been more lenient with REITs than common stock due to the law requiring distribution of 90% of earnings. 80% is the payout ratio of Reality Income, which is well run to maximize shareholder return, so I use them as the benchmark for REITs.