What: Kinder Morgan's (NYSE:KMI) stock has been in an absolute free fall of late. On Friday the stock dropped as much as 14% intraday before ending down by 12.7%. That downdraft continued on Monday, with the stock dropping by nearly 10% right after the market opened. Over the past five trading, days the stock has lost a whopping 33%.
So what: Kinder Morgan's recent issues started last Tuesday after Moody's lowered its outlook for the company from stable to negative, warning that a downgrade of bonds could follow. The concern here is that the company's bonds could be downgraded into junk territory given that its current credit rating of Baa3 is just one notch above junk.
This warning led to increased investor anxiety, which the company attempted to address on Friday by announcing its 2016 financial expectations. In that press release, Kinder Morgan reiterated that its distributable cash flow per share is projected to be enough to grow its 2016 dividend 6% to 10% above the 2015 level. However, the company did suggest that it is reviewing whether or not this is the best use of this cash, and instead could use it to fund its equity needs for 2016. Furthermore, the company plans to take action to maintain its investment grade rating and regain a stable outlook. Kinder Morgan plans to announce its formal plan in the coming days.
Analysts and investors all read this to mean that Kinder Morgan's dividend might not grow next year -- and, in fact, could actually be reduced or suspended until conditions improve. This uncertainty led to panic selling from investors wanting to get out before everyone else bails on the stock should the dividend be suspended.
Now what: Investors hate uncertainty, and right now Kinder Morgan is at peak uncertainty until it unveils its plan for 2016. That said, what is certain is that the company's primarily fee-based asset base will generate $5 billion in cash flow next year irrespective of what oil and gas prices do. While that cash flow had been earmarked for dividend payments, the company could divert that flow toward funding its robust project backlog or reducing it hefty debt load. While neither choice would be popular with the Kinder Morgan's income-seeking investors, either would bolster the company's uncertain financial position until more certainty returns to the energy market.
Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.