3 Reasons Investors Should Ignore the Oil Crash and Buy Kinder Morgan Now
In the spirit of being greedy when others are fearful, I want to point out three reasons Kinder Morgan (NYSE: KMI) shares have been, in my opinion, unjustifiably punished by the recent oil crash and are now trading at absurdly low levels. Here's why now is the perfect time for long-term dividend growth investors to snap up cheap shares in one of America's best and safest energy blue chips.
Kinder is trading at a record high dividend yieldOne of my favorite ways to look at whether a stock is truly undervalued is to look at its historical valuations, especially the dividend yield. That's because most investors own Kinder for the steady and growing quarterly income stream, making the dividend yield one of the most relevant and widely watched valuation metrics.
KMI Dividend Yield (TTM) data by YCharts
Since its IPO, Kinder Morgan Inc has traded in a dividend yield range of about 3.5% to 5%. Today, thanks to Wall Street's short-term pessimism about low energy prices, this recent share price drop is pushing the dividend yield to 6% -- the price having fallen so quickly that the chart above can't even keep up.
Kinder Morgan Inc's shares have only been around for a few years, and thus the yield range is a limited set of data points. However, the current yield in my opinion, represents a short-term failure by Wall Street to correctly price in the company's likely long-term growth prospects; which creates a unique investing opportunity.
You can have your high-yield cake and eat it, tooNot only can high-yield dividend growth investors lock in a generous current yield, but thanks to management's long-term forecast of 10% dividend growth through 2020, you can also see the potential for outstanding income in the future via the projected yield on cost.
Yield on cost is simply the dividend yield on the original cost basis at which you buy shares. As the dividend grows over time, yield on cost increases, showing the incredible power of long-term dividend growth investing.
Source: Author calculations based on management dividend growth forecast.
The S&P 500's historical compound annual growth rate, or CAGR, since 1871 has been 9.1%.This means that by investing at today's undervalued share price, long-term investors in Kinder Morgan stand to potentially end up beating the market through growing dividend payments alone. Add in the impressive compounding potential of dividend reinvestment over time and strong capital-gains potential once crude prices recover, and you can see why I'm so bullish on Kinder's shares at today's valuation.
Of course, everything hinges on two factors: management's ability to deliver on its projected dividend growth, and the ability to safely maintain the dividend throughout commodity cycles that -- as the past year has shown -- can be far more volatile than many investors expect. Luckily for Kinder investors, there are two great reasons to think management will be able to successfully deliver on its promise of well covered and growing dividends.
Dividend growth plans supported by a booming backlog and DCF/shareThe key to Kinder's long-term dividend growth strategy is the company's ability to grow distributable cash flow per share -- from which dividends are paid. Despite the oil crash over the past two quarters, Kinder's DCF per share has increased 23% year over year, thanks to new projects that have come online and its recent merger with its MLPs.
To insure continued DCF-per-share growth, Kinder is relying on its enormous backlog of projects -- the revenue from which is mostly protected by fixed-fee, inflation adjusted long-term contracts. In the second quarter, Kinder's backlog rose a truly impressive 20% to $22 billion in new projects expected to enter service over the next five years.
Takeaway: Ignore the oilpocolypse and focus on long-term dividend growth potentialI know it can be hard to ignore the short-term price of oil and the painful effects it can have on your portfolio. However, the experience of history's greatest value investors prove that the key to long-term success when investing in companies with exposure to volatile commodities such as Kinder Morgan is to see beyond the next few quarters' earnings results.
Instead, focus on the immense potential of America's shale natural gas and oil production and take heart in Kinder's monstrous and quickly growing backlog. Remember that Kinder's business model is mostly based on long-term-contracted, fixed-fee revenues, and that predictable cash-flow stream is what will probably allow management to continue growing the generous dividend for many years to come.
By investing in historically cheap shares now, not only are you likely to lock in potentially market-beating future capital gains when oil prices finally do recover, but you'll also benefit from a well covered dividend yield that will make you the envy of most other investors.
The article 3 Reasons Investors Should Ignore the Oil Crash and Buy Kinder Morgan Now originally appeared on Fool.com.
Adam Galashas no position in any stocks mentioned, however, he does leadThe Grand Adventuredividend project, which recommends Kinder Morgan.The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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