Shares of Kinder Morgan (KMI 2.28%) have languished for years. They're down 15% over the last five, even though Kinder Morgan's earnings, cash flow, and dividends are up while net debt has declined. This sluggish performance hasn't gone unnoticed by the company's co-founder and executive chairman, Richard Kinder. He discussed on the company's second-quarter conference call his frustrations with how the market values Kinder Morgan's stock.
Here's what he had to say about the stock and the company's strategy to grow value for shareholders.
Disconnection from reality
Richard Kinder started the call by discussing the company's strategy and financial philosophy. He noted that the pipeline giant is "generating lots of cash and using it in productive ways." However, that isn't getting "reflected at a higher price per KMI stock." He further stated: "Market pricing has disconnected from the fundamentals of the midstream energy business, resulting in a KMI dividend yield approaching 7%, which seems ludicrous for a company with the stable assets of Kinder Morgan and the robust coverage of our dividend."
That dividend yield is one of the highest in the S&P 500. Meanwhile, the company offers a more than 8% free cash flow yield, putting it in the 84th percentile of companies in the S&P 500. These factors suggest the stock price is dirt cheap.
Unfortunately, Kinder doesn't "have an answer for this disconnect." He said: "It's easy to blame factors over which we have no control, like the mistaken belief that energy companies have no future or the volatility of crude prices, which, in fact, have a relatively small impact on our financial performance." While those factors are likely putting some weight on the stock, investors seem to prefer companies with outsized growth prospects over those that provide stability and income. That's evident in some of the nose-bleed valuations of many tech stocks before their steep slide over the past few months.
What Kinder Morgan plans to do about the disconnect
Kinder's comments led an analyst on the call to ask if there were any specific actions the company was considering that might positively impact its stock price. Kinder responded by saying: "Well, I've learned a long time ago that the ability of management teams to influence the stock price is pretty remote." Furthermore, he noted that this isn't a Kinder Morgan-specific issue as valuations are down across the midstream sector.
Because of that, instead of doing something about the disconnect, Kinder Morgan plans to focus on what it does best: generating and deploying cash. The company plans to continue paying an attractive dividend that it wants to keep growing. It also expects to invest in expansion projects and acquisitions that meet its strict return hurdles. Finally, it will make share repurchases when those make sense.
The company has already secured a couple of new high-return expansion projects this year. On top of that, it recently made a deal to boost its renewable natural gas business. These investments will help grow its cash flow in the future, giving it more money to deploy on behalf of shareholders. Meanwhile, the company repurchased 16.1 million shares already this year. The savings from the current dividend alone is 6.5%, giving investors a nice return on those repurchases.
"So that's our game plan," stated Kinder: "pretty simple and not very imaginative really. But I think in the long run, maybe we're the tortoise versus the hare...I think we get rewarded for the kind of performance we have produced now, quarter after quarter after quarter."
In other words, the company plans to continue doing what it's doing. It believes that eventually, the market will start to put a higher value on its stable cash flows and ability to wisely deploy those cash flows on behalf of investors.
That might not be what some investors want to hear. Some might prefer the company to make a big change, while others could want it to become even more conservative. To these investors, Kinder quipped, "to paraphrase Abe Lincoln, I know we can't please all of you all the time."
Slow and steady
While Kinder Morgan's management team would love to see its stock trade at a higher price -- management and the board own 13% of the company's outstanding stock -- they're not going to do anything different to try and boost the share price. Instead, they plan to stick with the current strategy of generating and deploying cash because they believe it will grow shareholder value over time. In the meantime, investors are paid well while they wait, given the company's high-yielding dividend. That makes the company best suited for investors seeking a sustainable passive income stream.
