Don't Expect Kinder Dividend to Bounce Back Soon

As we expected, Kinder Morgan reduced its dividend in the midst of a very challenging energy market. Under the new policy, Kinder will pay a quarterly dividend of $0.125 per share ($0.50 per share annual rate) versus its previous $0.51 per share ($2.04 annual). The reduced dividend underscores Kinder's focus on protecting the balance sheet and maintaining an investment-grade rating during the prolonged energy market downturn. Moody's, which lowered its outlook on Kinder debt to negative from stable last week, has now reinstated the stable outlook, while S&P has reaffirmed its stable outlook.

While we applaud management's efforts to focus on the balance sheet, we are disappointed that it has come to this. We are placing Kinder under review until we re-evaluate our fair value estimate. Kinder will not have the means to increase the dividend in the foreseeable future, as it is squarely focused on funding growth projects with internally generated cash flow and paying down debt to maintain its investment-grade debt rating. We believe that equity investors looking for growth and income will be disappointed since Kinder will not be in a position to grow the dividend until major growth projects are funded and on line, in 2018 and beyond.

Management is targeting a 5.0-5.5 times net debt/EBITDA, still quite high in our opinion versus many of its peers and susceptible to further tightening by rating agencies if commodity markets remain even lower for longer. While shares have traded off meaningfully in the past week and indeed the past year, we believe investors should steer clear of Kinder and instead invest in midstream companies with solid balance sheets and stable cash distributions with strong coverages, including Magellan Midstream Partners, Enterprise Products Partners, and Spectra Energy Partners.

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