Two months ago, gas pipeline operator Kinder Morgan (KMI 1.95%) gave investors the kind of news they love to hear -- dividends were going up. Raising its annualized dividend to $1.76, a whopping 16% bump, Kinder Morgan announced its 15th straight quarterly dividend increase since (re-) going public in its 2011 IPO.
Gee, that was fun while it lasted.
Kinder Morgan shifts into reverse
Unfortunately, it didn't last long. This morning, Kinder Morgan slammed the brakes on its dividends, and shifted abruptly into reverse. Warning that the "investment grade rating" on its debt was at risk, and expressing no desire to "access the equity market" (i.e., sell shares and dilute shareholders to raise new cash), Kinder Morgan abruptly cut its dividend by more than 70% Wednesday. Instead of $1.76 per share, investors can now expect to collect no more than $0.50.
Wall Street was not amused.
As the dividend goes, so goes the rating
Responding quickly to Kinder Morgan's cut, analysts at RBC Capital cut their own recommendation on the stock from outperform to sector perform -- essentially removing their buy rating on Kinder Morgan shares. Moreover, according to a report from StreetInsider.com, the analyst is also slashing its price target significantly -- from $29 a share to just $19.
But is RBC overreacting?
Let's go to the tape
A lot of folks seem to think so. Up on Wall Street, investors are shrugging off the dividend cut, and instead cheering Kinder's implied promise not to dilute their shareholdings in the company. Shares are already up more than 8% in Wednesday morning trading, and over on Motley Fool CAPS, Kinder Morgan shares are being rated an optimistic four stars (out of a possible five).
Now contrast that with RBC's record in the oil and gas sector, which can only be described as abominable. Don't get me wrong -- in many respects, RBC is a fine shop, and does a good job of analyzing stocks. According to our CAPS stats, this banker ranks in the top quintile of investors we track.
Unfortunately, RBC just is not very good at oil and gas. A few examples:
|
Company
|
RBC Said: |
CAPS Says: |
RBC's Picks Beating (Lagging) S&P By: |
|---|---|---|---|
|
Valero Energy |
Outperform |
**** |
112 points |
|
Freeport-McMoRan (NYSE: FCX) |
Outperform |
**** |
(172 points) |
|
Crosstex Energy |
Underperform |
***** |
(812 points) |
Over the nine-plus years that we've been following this banker, RBC has made affirmative buy-sell calls on Valero once, Crosstex twice, and Freeport twice as well, with the cumulative results you see above. (Side note: Freeport-McMoRan, another energy stock that RBC has performed poorly on, joined Kinder Morgan in cutting its dividend this morning. But whereas Kinder cut its dividend by "only" 70%, Freeport-McMoRan has suspended its dividend entirely -- and just as at Kinder Morgan, Freeport's stock is soaring on the news.)
These results are reflective of RBC's record overall -- roughly 33% accuracy across an amazing 173 recommendations in the oil, gas, and mining sectors over nine years' time. And during that time, RBC has managed to underperform the S&P 500 by a staggering 7,162 percentage points, combined, lagging the market by an average of more than 41 points per pick.
So suffice it to say: RBC's record fails to impress.
The upshot for investors
Investors' reaction to today's dividend cut seems strange at first glance. Priced north of 32 times earnings, Kinder Morgan is clearly not a value play. Thanks to the dividend cut, it's no longer a growth play, either. While it yielded more than 12% on its dividend pre-cut, the reduction to $0.50 means Kinder Morgan shares now yield less than 3%. And of course, with analysts continuing to predict no more than 4% growth in earnings over the long term, Kinder Morgan is also not much of a growth play.
Given all this, investors' decision to bid up Kinder Morgan shares on news of the dividend cut suggests they're placing a whole lot more faith in company Chairman Richard Kinder to right his ship, than in RBC's prediction that the ship will sink.
Based on the numbers, I can't say for certain that investors are right to bet on Kinder Morgan -- but as for looking which way RBC is pointing on oil and gas, and immediately marching in the opposite direction? That looks like a good call to me.
