Recent Buy // KMI

I had some extra capital available and decided to make another stock purchase before the end of the month.  Like I’ve said before, I am committed to making my dream of financial independence come true. This means, instead of spending any extra money I may have after my living expenses are paid, I will be deploying it to acquire stocks to build my dividend investing portfolio. My strategy involves researching high quality, stable businesses that not only have a history of paying dividends but also growing the dividend rate.

A few weeks ago, I made an inaugural purchase to my dividend investing portfolio with Johnson & Johnson. A huge company with many products that are used all over the world and has huge brand recognition. This time around, however, I’ve decided to diversify and invest in a company that is not a household name and in a completely different industry: Energy.

I purchased 28 shares of Kinder Morgan, Inc. (KMI) on 7/21/15 for $35.72 per share.

recentbuy_kmi

Overview

Kinder Morgan, Inc. is one of the largest energy infrastructure and energy companies in North America. KMI owns/operates 69,000 miles of pipelines to transport natural gas, refined petroleum products, crude oil, and carbon dioxide through the United States and even in parts of Canada.

While they are in the energy sector, they do not actually sell commodities (oil, gas, etc.). Why is this important? Because they avoid some of the risk that is associated with selling energy. Think of it like this. KMI operates like a toll road; they own the pipelines to distribute energy and charge fees from their customers (major oil companies, energy producers/shippers, local distribution companies, etc.) to distribute energy. So, for example, when the price of a barrel of oil drops, they aren’t as negatively affected. Why? Because all KMI does is move the product.

Quantitative

  • KMI has only been publicly traded since 2011. Revenue has increased an average of 25.46% per year.
  • EPS is 0.69 and has increased by 24.96% per year since 2011.
  • Dividend yield is impressive at 5.49%. The dividend has grown by 14% year over year since 2011.
  • Debt/ Equity radio is somewhat high at 1.18.

Qualitative

As one of the largest owners of energy infrastructure in North America, KMI has built a large economic moat that would be hard for competitors to easily increase market share. It would take an extensive amount of time and start-up capital to compete with KMI as a transporter of energy. Also, by not actually selling commodities, their exposure to stock price fluctuations and decreased operations risk is mitigated.

Kinder Morgan has also announced that they are committed to growing the dividend by 10% year over year until 2020. That’s impressive! Think about it.. By becoming a shareholder now, I will earn a total of $259.84 from my 28 shares. That doesn’t even take into account the fact that the share price will likely continue to rise (nothing is guaranteed but it’s likely) . But even if the stock price stays stagnant until 2020, $259.84 is promised to me just for deciding to become an owner. And once the dividends are reinvested, the dividend income and portfolio growth potential are increased even more.

Another thing that stands out about KMI is their executive compensation structure. The executive chairman , Richard Kinder, is a man after my own heart; he lives off of the dividends his stocks provide. By making only $1 in salary per year, his income is directly tied to those of shareholders. This type of pay structure helps support the fact that he has the shareholders interests in mind and is committed to growing the company.

Valuation

  • The P/E ratio is 49.1. At first glance this seems extremely high but evaluating MLPs and MLP-related stocks based on P/E can be a little misleading. Stocks in this category should be valued based on cash flow measures.
  • Morningstar Fair Value: $43

Conclusion

Since I am in the early stages of building my portfolio, I am looking for attractively valued companies with higher yields. By choosing quality companies with attractive yields, my ability to accumulate more shares of quality companies increases. When I can accumulate more shares, I am able to increase my ability to grow my dividend income. KMI is one of those stocks that I believe will help me with achieving that.

At the time of purchase, KMI’s stock was down 16.9%. Or in other words, the stock was on sale for 16.9% off. Since then, the stock has fallen another 5.76%. This is likely due to investor panic due to the low price of oil. However, based on the cash flow and contracts set in place, I am confident that KMI is a good long-term buy.

This purchase will add $54.88 to my annual dividend income, based on the current $0.49 quarterly dividend.

Full disclosure: Long KMI, JNJ

Thanks for reading.

Images: Death to the Stock Photo with graphics added by One Woman’s Worth.

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Author: One Woman's Worth

Born with a dollar and a dream. Hoping to double both in my lifetime.

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