Today I bought shares of Kinder Morgan, Inc. (KMI), the third-largest energy company in North America and operator of an extensive network of pipelines for transporting natural gas, crude oil, and petroleum products. My most recent previous purchase of KMI was in July 2013.
I had not been planning to increase my position in KMI (it was already the second-largest holding in my portfolio), but today the stock price suddenly fell over 5%, apparently because some hedge fund person voiced a negative view of KMI and its associated entities. I think the decline pushed the stock into undervalued territory. Using a Dividend Discount Model with a dividend growth rate of 10% (which is the company's long-term target) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $39.17. Morningstar gives a fair value of $41.00 and a 3-star rating. The average of those two estimates is $40.09, which implies an 11% margin of safety at my purchase price.
I bought 35 shares of KMI at the price of $35.61 per share plus commission, giving me a 4.47% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $14.00 from this purchase, which will add a total of $56.00 to my annual dividend income. This purchase was made in my Roth IRA by combining $1,215 in new capital with accumulated dividends. I normally prefer to make slightly larger purchases, but I can only contribute another $1,235 to my Roth IRA before I reach the limit for 2013, so I left some room for one more contribution and purchase down the road. I now have a total of 165 shares of KMI (80 in my taxable account and 85 in my Roth IRA) and I will receive combined quarterly dividends of $66.00. My forward 12-month dividend total increases to $2,727. After this purchase, KMI remains the second-largest holding in my portfolio with a weight of 6.5%.
As mentioned in my monthly review, I will likely contribute about $1,000 to my taxable account that I can combine with accumulated dividends to make a purchase. I am satisfied with the size of my KMI position, so I will buy something else -- perhaps a new stock for my portfolio.