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.
Hi DGI, Yes, i did buy more of KMI to my existing position, as you had mentioned my holding weight is higher than i normally want to hold in one stock, however with the attractive valuation did not want to miss the opportunity. Wonder what the report is going to provide, in the long run should be fine with the safely margin build in even if the price declines. This is the third position we both have purchased on the same day, prior two being MSFT and INTCReplyDelete
Anonymous: I'm also interested in reading the report when it comes out next week. However, I don't give much emphasis to the views of any particular analyst (who may have a specific agenda), so I'll interpret whatever is in the report with a grain of salt. I agree that KMI is trading at an attractive valuation and I'm okay with it representing 6.5% of my portfolio (as a rule of thumb, my maximum weight for any single stock is 10%). Thanks for your comment!Delete
Hey DGI, I am going to be opening up a position tomorrow in KMI as well. Its been on my watch list along with KMR and KMP. I am curious to what the report will hold on when released on Sept 10th, but believe this is giving us a good buying opportunity. Just checked your portfolio; any reason why the position in only KMI and not in KMR/KMP? Thanks again!ReplyDelete
Costa: The report should be interesting to read. As for why I chose to invest in KMI, I prefer to avoid the tax complications of KMP and I prefer to get my dividends in cash rather than in shares like KMR. In addition, KMI is projected to have a higher dividend growth rate, so I don't mind a somewhat smaller starting yield.Delete
Thanks so much for the reply. I decided to start a position in KMR for its tax advantage as its going in my taxable account and I hopefully won't be tapping it for a few decades. Keep up the great work here and on Seeking Alpha!Delete
Costa: Thanks for the feedback!Delete
Yeah I just checked my watch list and noticed KMI was way down today. How could it be down 6% when the market was up considerably? I decided to investigate. Come to find out Kinder Morgan is Hedgeye's new target!ReplyDelete
Personally I think the Hedgeye folks are idiots and are obviously drawing negative attention to make profits off short positions. Unfortunately my opinion doesn't matter, and I witnessed first hand what they did to Linn Energy. Pretty crazy. Perhaps crazy enough to derail a large and favorable acquisition. I still think Linn is just fine, although it will likely take a while to raise investor sentiment.
As for KMI, I am now paying very close attention. It's already weighted roughly how I want it, so no rush here. The full Hedgeye report comes out Sep 10th, I may purchase a slice then. Just like Linn, I think Kinder Morgan will be just fine. Unlike Linn, I am open to purchasing more Kinder Morgan shares. We shall see.
CI: It will be interesting to read a bear's perspective on KMI, but with great caution -- Hedgeye likely has an agenda they're trying to push. I noticed that a couple of other analysts (e.g., Deutsche Bank) have already reiterated bull perspectives. I agree with you that KMI will likely be fine, but there could be some turbulence ahead.Delete
I'm about to add to my position today because of this dip as well. Hedgeye is an odd company and are basically famous for two reasons; i) they have attacked three MLPs with mixed results - BreitBurn, Linn (correctly), and now Kinder Morgan; ii) a few years ago they came out with a "SELL ALL US STOCKS" (all caps theirs) note to clients...and the S&P500 has since gained 55%. The fact that a tweet can drop the stock 6% is crazy, but at least Deutsche Bank came out last night in strong defense of the company. I like Kinder and I hope to hold it in my Roth until the day I pass.ReplyDelete
BidAsk: I honestly don't know much about Hedgeye, but from the little that I've read they do indeed seem to be an odd company, perhaps with questionable motivations behind their reports. Similar to you, I like KMI and I hope it remains a core long-term investment of mine.Delete
Great buy here. I'm still thinking about this. I think KMI is a great buy here with one of the highest yields it's offered since going public again, but I also already have a fairly large weighting to the position. I'm going back and forth, but leaning toward buying. We'll see if it drops any further, especially on the 10th when the hedge fund's report comes out. Very interesting stuff.
I think you made a great call.
DM: Thanks! I think we have similar-sized holdings in KMI now, and as I mentioned it is my second-largest holding, so I would have to see another big drop before I would consider buying again. I'm also leaning toward new stocks (i.e., that I don't already own) for my next purchase or two.Delete
Following the twitter brawl b/t Hedgeye and ZeroHedge right now? Looks as though the 'report' they released was nothing more than pointing out the lack of maintenance capex KinderMorgan had slated for some of their pipelines...an issue that has been addressed by Richard Kinder in the past.ReplyDelete
BidAsk: I just read a bit of it. Hedgeye comes across as unprofessional and lacking in credibility. It seems like the market realized that today.Delete
but still KMI was down last days...short sellers?Delete
Martin: I don't know... I try not to speculate about the reasons for short-term price movements.Delete
The best part about trading groups is that the members goals are aligned with the goals of the website.Free stock pick websites align their goals with the insiders of the stocksReplyDelete
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