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Kinder Morgan Slashes Dividend = More Pain Coming For Midstream Stocks?

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Kinder Morgan Slashes Dividend = More Pain Coming For Midstream Stocks?
  • Shares of Kinder Morgan Inc (NYSE: KMI) have fallen more than 60 percent year-to-date, amid the weakened commodity environment.
  • The latest blow to Kinder Morgan investors occurred on Tuesday when the company's Board of Directors slashed its dividend by around 75 percent to an annualized rate of $0.50 per share.
  • Wall Street analysts were mixed following Kinder Morgan's announcement and explored the potential sector-wide impacts.

Kinder Morgan's slash to its dividend prompted the rating agency Moody's to change its outlook to 'stable' from 'negative.'

Kinder Morgan's Board of Directors approved a plan on Tuesday to reduce its dividend by approximately 75 percent to an annualized rate of $0.50. Shares were up more than 8 percent at $17.02 on Wednesday morning.

Wall Street's reaction was mostly negative as the company's dividend cut could have broader implications for the entire industry.

Credit Suisse: ‘Ushering In A New Era'

John Edwards of Credit Suisse commented in a note that a 75 percent reduction to Kinder Morgan's dividend was "not expected" as a 50 percent reduction to an annualized $1 a share rate was "widely" anticipated.

Edwards continued that the "overriding considerations" for the larger than expected dividend cut was to preserve the company's investment grade rating and eliminate external equity requirements. In addition, reducing debt requirements for capital spending and reducing leverage were "also important."

Edwards also noted that the dividend cut has a broader sector implication and could put pressure on other companies to reduce their pay-outs and/or hold on to additional amounts of cash.

"We ask the following question – if an MLP faces a yield above 12 percent for a sustained period of time, what do investors think management teams should do?" the analyst hypothetically asked in his research note. "If companies continually pay out the distributions only to have to go back to capital markets and re-raise this capital and are not being rewarded in equity valuations, why should they continue to pay out such larger portions of the cash flow being generated?"

Related Link: Kinder Morgan Is A Drag On This ETF

Bottom line, Edwards suggested that a "slowdown" in the distribution growth is the more likely outcome as companies are "incentivized" to retain more of their cash.

Shares remain Neutral rated with a price target lowered to $7 from a previous $18.

RBC: ‘Surprised' By Magnitude

Elvira Scotto of RBC Capital Markets commented in a note that investors have been pricing in a dividend cut, but Kinder Morgan's 75 percent reduction was surprising.

Scotto noted that due to the size of Kinder Morgan's dividend cut, the company is not expected to issue any new common shares until 2019 as the company's internally generated cash flow will now be able to fund the equity component of its growth capital. However, the analyst suggested that a 50 percent dividend cut would have "been sufficient" to satisfy the equity component of its growth capital.

Bottom line, Scotto argued that while a large dividend cut should be viewed as a "prudent" move for the longer-term, there are "little" catalysts available to move shares higher over the next 12 months. As such, investors could find better total return opportunities elsewhere.

Shares were downgraded to Sector Perform from Outperform with a price target lowered to $19 from a previous $29.

Goldman Sachs: ‘Hopeful' Stock Has Begun A ‘Bottoming Phase'

Theodore Durbin of Goldman Sachs commented in a note that Kinder Morgan's dividend cut is a "bitter pill" for shareholders and the stock should see further volatility as income investors "rotate out."

However, the analyst noted that he is "hopeful" that Kinder Morgan's stock has begun a "bottoming phase." The analyst pointed out 1) the stock is trading at around 10x 2016E EV/EBITDA, 2) the company has a "highly stable" operating cash flow, 3) the company has a "visible" EBITDA growth, 4) the company also has a "large" tax asset, and 5) a path to reduce leverage with no medium-term equity needs.

Durbin continued that Kinder Morgan's new dividend ratio implies a 3.2 percent yield (based on Tuesday's closing price) which is short of the large-cap midstream C-corp peer average of 7.7 percent. However, the analyst suggested that a "more relevant" valuation metric is P/DCF in which Kinder Morgan's stock trades at a 7.0x multiple on 2016 estimates – a 34 percent discount to its peers that trade at an average multiple of 10.6x.

Durbin also stated that Kinder Morgan's "bellwether" dividend cut will have a negative near-term impact on the entire midstream sector as it could "provide a rationale" for other firms with a high leverage and/or low coverage to reduce their dividends.

Shares remain Buy rated with an unchanged $44 price target.

Latest Ratings for KMI

DateFirmActionFromTo
Jan 2021BarclaysDowngradesOverweightEqual-Weight
Jan 2021Raymond JamesDowngradesOutperformMarket Perform
Dec 2020Credit SuisseDowngradesOutperformNeutral

View More Analyst Ratings for KMI
View the Latest Analyst Ratings

 

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