Kinder Morgan : Update – Dividend Slashed


What’s next for Kinder Morgan (KMI) now that it has slashed its dividend? Investors are likely hoping that the company doesn’t follow in Boardwalk Pipeline’s (BWP) footsteps.

Late Tuesday, Kinder Morgan announced that it was going to cut its dividend by 75% to $0.12 per share from $0.51. The move mirrors Boardwalk Pipeline’s own distribution cut from 2014 in which investors were paid $0.10 instead of $0.53. Shares of Boardwalk Pipeline’s stock were nearly halved overnight on the news and the company is still trading around $11.50 instead of in the mid-$20 range it was trading at prior to the cut.

Investors are surely hoping Kinder Morgan won’t repeat Boardwalk Pipeline’s fate. In after-hours trading, shares of Kinder Morgan are down about 6%, which is certainly nothing an investor wants to see, but it is no worse than declines the stock has seen in recent days.

“The way the stock is reacting it’s almost as though KMI already cut its dividend,” Shneur Gershuni of UBS Securities wrote in a note Friday. “Our experience suggests there could be some initial downside should Kinder Morgan cut its dividend.” As of Friday, Gershuni had a Buy rating on Kinder Morgan and a price target of $21.

Gershuni’s note was in response to a press release Kinder Morgan posted Friday in which it said it would be revising its financing plans and dividend policy with the goal of maintaining its investment grade rating. At the time, the company stressed that it had sufficient cash flows to support dividend growth in the range of 6% to 10%. Optimistic investors hoped that the outcome of Kinder Morgan’s board deliberations would be a cut to its dividend growth guidance. Instead, shareholders will be getting an actual cut to their dividend.

Sounding an optimistic note, Gershuni wrote that after the dust settles, Kinder Morgan could find itself as “the fastest growing C-corp with a much improved balance sheet.” Furthermore, if Kinder Morgan’s plans resulted in maintaining its investment-grade weighting and no longer having a Negative outlook by Moody’s, Gershuni sees additional upside to Kinder Morgan’s price target.

With respect to Kinder Morgan’s credit, Larry McDonald of Societe Generale said on CNBC’s “Fast Money” that the price Kinder Morgan’s bonds could get a nice bounce on the news. The upward tick in bond pricing could be what investors noticed yesterday.

In these situations, creditors will often lobby the CFO to cut the dividend, McDonald said, but he added that it is not clear if those conversations were happening at Kinder Morgan.

Either way, Kinder Morgan is due for a hectic day at tomorrow’s open.


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