Wednesday, November 13, 2013

Stock Bought: KMI

For my first purchase 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 September 2013.

I continue to think that KMI is undervalued. 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 $37.84. Morningstar gives a fair value of $41.00 and a 4-star rating. The average of those two estimates is $39.42, which implies a 13% margin of safety at my purchase price.

I bought 60 shares of KMI at the price of $34.40 per share (no commission paid; I had a free trade), giving me a 4.77% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $24.60 from this purchase, which will add a total of $98.40 to my annual dividend income. This purchase was made in my Roth IRA using rollover money and it reduced my cost basis by a little over 2%. I now have a total of 225 shares of KMI (80 in my taxable account and 145 in my Roth IRA) and I will receive combined quarterly dividends of $92.25. My forward 12-month dividend total increases to $3,031. Kinder Morgan remains the second-largest position in my portfolio (6.0% weight).

10 comments:

  1. Awesome! Love the continued value in KMI and agree that it is still undervalued. The potential for dividend growth, plus the starting yield, and you've set yourself up well for the next few years.

    I would imagine you are looking elsewhere in the immediate future for other purchases considering the relative weight of KMI in your portfolio, correct? Thoughts on what else is on your radar?

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    1. w2r: Thanks! As much as I like KMI, I will indeed be looking elsewhere for the next purchases for my Roth IRA. I would like to make two or three purchases of REITs. I already own a decent-sized position in HCP, so I'm interested in adding other REITs. Some thoughts on a few names:

      ARCP: A recent spree of big acquisitions has substantially boosted its property holdings in a very short period of time. I like the tenant mix and geographical diversification. The valuation and yield are both attractive, but I wonder how well the company will digest the recent acquisitions from an operational standpoint and perform going forward, when much less growth will come from acquisitions. I need to think more about this one.

      DLR: It is the most undervalued of all the REITs I've looked at, but perhaps for good reason. A lot of folks are griping about accounting issues and weak guidance for 2014, but a bigger concern for me is that I have difficulty judging the company's long-term growth prospects. I don't see much of an economic moat or switching costs with DLR. That said, I think it could still turn out to be a good investment, especially from a valuation perspective, but I'll likely continue to pass on it.

      O: I would love to own the "monthly dividend company," which has a good tenant mix and geographical diversification. However, the valuation is a bit too high, so there isn't much of a margin of safety. However, if the stock gets below $39, then I might start a position.

      OHI: Given that I own HCP, I'm hesitant to add another healthcare REIT, but if I did, it would be this one. My main concern is that it is a pure play on skilled nursing facilities, and this lack of diversification could be good or bad depending on future changes to healthcare.

      I welcome suggestions of other REITs that might represent good additions to my dividend growth stock portfolio.

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  2. While my current DG porfolio doesn't show it on my site (still posting my catch up posts after my summer blogging hiatus), I own three of those on the list, ARCP, OHI, and DLR. Certainly, if O were to drop in price, similar to what you are looking for, I would consider a move, provided the capital was available and designated for the DG portfolio.

    DLR has been the most disappointing, while OHI and ARCP as the two I am most excited about going forward. Given that I bought DLR when it dipped down this past summer, the most recent drop is quite concerning. However, as long as they continue to prove they can cover their dividends and not be at risk of a cut, I will continue to hold them. Of course watching the price drop almost 20% doesn't give me a SWAN feeling at all.

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    1. w2r: Thanks for the feedback on those REITs. At the moment I'd say I'm leaning toward either ARCP or O (or both) as possible additions to my portfolio.

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  3. Nice buy. I just recently added more KMI this week and will probably post about it tomorrow. They certainly have a large and quickly growing yield.

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    1. AAI: Thanks, and nice move on buying more KMI yourself.

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  4. I am primarily buying KMP (in my taxable account) but recently was thinking on adding KMI to my ROTH. Maybe I should reverse it...

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    1. Martin: I don't want any tax complications from owning MLPs, which is one reason why I've chosen KMI over KMP. Another reason is that, despite its lower yield, KMI is set up to experience higher dividend growth over time. That said, I think both of them (as well as KMR) are good investments.

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    2. The main thing we are trying to do here is get more money back than we put out. Kmr certainly is a company that can compound a growing dividend. I gets the same distrubution as KMP, except with tax deferred compounding, and no paperwork. Is there any reason why Kmr cannot be included in a dividend growth portfolio?

      Dividend chart: http://www.buyupside.com/dividendcharts/dividendchartdisplay.php?symbol=kmp&interval=allyears

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    3. Sumflow: I think KMR is also a good candidate for a dividend growth portfolio -- I know some dividend growth investors who own all 3 (KMI, KMP, KMR). I think it comes down to a matter of personal preference.

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