Is Dividend Cut A Positive for Kinder Morgan Inc (NYSE:KMI)?

March 31, 2016

Executive Director Shneur Gershuni of UBS Investment Bank says Kinder Morgan Inc (NYSE:KMI) is in an interesting position after cutting its dividend by 75% late last year.

Many often view a big dividend cut as a material decline coming in their base business, but that was not exactly the case. In fact, their earnings were actually expected to increase in 2016 versus 2015.

The challenge was access to capital more than anything else. Bond yields had gone up, their equity yield had gone up, and basically their dividend was almost as big as their operating cash flow, yet they still had at that time almost $5 billion capital plan which they had expected to fund out of the capital markets, and the capital markets were increasingly tougher and tougher to access. So they made a decision to cut their dividend, and that way they could still continue to fund their capex growth.

We expect with the cut that they will actually be able to delever over the next seven quarters and be able to reevaluate their position on a go-forward basis. We think that their issue is mostly behind them at this point, and so you are able to look ahead, and when you look at it on a true cash flow basis, their earnings are actually still expected to continue to move up.

Shneur Gershuni