I have been getting a lot of mail from readers of my two-part series on risk-averse investing, in which I presented 15 guidelines that I follow in my own practice as a money manager.
As you'd expect, a lot of that mail is from readers asking the questions: What's left? Where are these companies that generate great cash flow, pay dividends, and are run by honest, hardworking owner-operators? These readers want examples of companies without too much debt, companies that compete in attractive industries and have understandable businesses, that don't dilute their shareholders with excessive options and don't have massive pension liabilities.
Kinder Morgan pays up
Well, here's an example for you: Kinder Morgan (NYSE:KMI). Kinder Morgan owns the general partner of Kinder Morgan Energy Partners (NYSE:KMP), the largest pipeline master limited partnership in the United States, as well as other significant mid-stream energy assets, including natural gas pipelines, natural gas distribution networks, and gas-fired power plants. (I own shares of both KMI and KMP in various managed accounts).
Kinder Morgan has one other asset that doesn't show up anywhere on the balance sheet -- senior management that works to enrich shareholders because they are shareholders. In fact, it offers a perfect example of a management team that behaves like owner/operators.
This fact was underscored yesterday afternoon when Kinder Morgan became one of the first companies to take drastic action in response to the recent tax cut on dividend payments. It has always returned cash to shareholders in the form of dividends and share repurchases, but given the high tax rate on dividends, it has in the past generally directed the lion's share of the cash it returns to investors to share buybacks, which are much more tax efficient.
Yesterday, the company announced that it would increase its cash dividend by a whopping 167% from the current $0.60 per share annually to $1.60 per share, beginning with the next scheduled payment to shareholders on record on July 31, 2003. With this action, Kinder Morgan provided further evidence that the management team doesn't just talk the talk when it comes to returning cash to shareholders. That's not to say that KMI Chairman and CEO Rich Kinder can't talk the talk -- he can talk with the best of them. But this is a company that backs up the talk with performance for its shareholders.
None of this should come as any great surprise to longtime Kinder Morgan followers. The company has been wonderfully consistent in communicating its core strategy of "Real Assets, Real Earnings, Real Cash." It takes every opportunity, whether in the annual reports, quarterly conference calls, or on the company website, to communicate its commitment to generating cash and returning that cash to investors.
Eyed with suspicion
Last year around this time, suspicious investors were eyeing every mid-stream energy company with suspicion in the wake of the Enron fallout. A cloud of that suspicion naturally hung over Kinder Morgan, a company with obvious Enron connections (CEO Kinder was a former senior executive at Enron back in the mid-1990s.)
Back in March of last year, Fool guest columnist Whitney Tilson wrote a fantastic piece on the company that illustrated the obvious differences between Enron and Kinder Morgan, and noted that the investor skepticism made Kinder Morgan's stock a bargain.
The company responded to the swirling rumors and bearish comments by holding a conference call in April in order to answer every question and address any rumor that anyone cared to ask about. At the company conference call in July 2002, Richard Kinder made the following comments (conference call transcript courtesy of www.fdfn.com):
I think there's a crisis of trust right now in corporate America and specifically in the mid-stream energy area. This crisis was caused by the acts of a few people, but I think it has cast a shadow over virtually all corporate managements and particularly in our area.
Most of the abuses, it seems to me, have come from the disconnect between the interests of the principals, the shareholders, and the interests of the agents, the senior management teams at various corporations. At Kinder Morgan, we don't have this principal/agent disconnect problem. Instead, we have the lowest paid CEO at any major company in America -- that is according to the latest BusinessWeek survey -- with one of the highest ownership positions in the S&P 500.
I will remind you that my compensation package includes no options, no bonuses, and the only value I derive from Kinder Morgan results from my ownership of 20% of KMI and several hundred thousand units of KMP. My incentives, it seems to me, are about as aligned with shareholders as they can be.
So when you're casting your net to find witches in the brew, I just ask you to ask the question: Where is my incentive or the incentive of senior management to sacrifice the long-term interest of the company and the shareholders for short-term profits? I don't have any damn options to cash in. I don't have any bonus that is going to be inflated because we did better this quarter or this year versus next year or 2004.
Consistent message, consistent results
Here are some other examples of Kinder Morgan's message to shareholders:
From the 2002 annual report:
We carry our "acting as owners" philosophy across the organization. We limit base salaries for the rest of senior management to $200,000 a year, well below industry medians. We don't own corporate jets or pay for first-class air travel, we don't do any advertising or produce expensive annual reports, and we don't own suites or tickets to sporting events or buy naming rights to sports facilities. In short, we try to run the company like a prudent person would run his or her own personal affairs.
From the earnings conference call, April 16, 2003:
KMI is really a unique animal; it is a cash flow machine. We expect $400 million or so of cash flow this year, after interest, after sustaining capital expenditures, and after expansion capital expenditures. So what do we do with this? We are going to return all that money to shareholders, and we are going to do it in three ways. We are going to pay down debt, and we are going to do stock buybacks and we will increase the dividend at KMI.
With its latest action to increase dividends, Kinder Morgan has once again demonstrated that it matches its words with action. While the stock is no longer as cheap as it was last year, I'm holding on to my shares. I believe the company will continue to deliver on its promises, and while the stock isn't cheap today, I would be surprised if the market offers us another Enron discount on a company of this caliber anytime soon.
Zeke Ashton has been a longtime contributor to The Motley Fool, and is the managing partner of Centaur Capital Partners, LP, a money management firm in Dallas, Texas. Please send your feedback to [email protected]. At the time of publication, Zeke owned shares of KMI and KMP in some managed accounts.
