Go To

2 Reasons To Avoid This 6.35% Dividend Stock

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

To help you figure out how to protect your retirement portfolio in these uncertain times, today I want to show you 2 Reasons To Avoid This 6.35% Dividend Stock.

Kinder Morgan (KMI) is one of North American’s largest “midstream” energy firms.

It owns more than 70,000 miles of natural gas pipelines in the United states.  And almost 10,000 miles of oil and refined products pipelines.

Because of the enormous breadth of its pipeline operation its weathered the oil price crash from last year well.  And its stock is even up 7.62% in the last 12 months.

But this is all in the past…

Today, I want to help you figure out whether it’s a great buy now for your retirement portfolio with all the uncertainty we’re dealing with today.

It’s based in Houston Texas.  It has a $37.2 billion market cap. And it pays you a massive 6.35% dividend. Which is reason #1 to consider buying its stock.

Kinder Morgan’s 6.35% Dividend

Over the last decade Kinder Morgan’s paid out a total of $10.98 per share in dividends.

At today’s share count of 2.263 billion shares that’s equal to $24.85 billion paid out to shareholders in that time.

It also grew its dividend 40.5% from $0.74 per share in 2011 to $1.04 per share now.

These dividend payments will help you in normal times earn cash if you take the money out.  Or allow you to buy more shares over time if you reinvest the dividends.

These regular payments will help you earn more money for your retirement.  And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns massive profits.  Which is reason #2 to consider buying Kinder Morgan for your retirement portfolio.

Kinder Morgan Earns Massive Profits

Over the last decade it earned an average operating income margin of 27.6% per year.

I look for anything above 10% so this is fantastic.

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 12.5% per year on average.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.

J.M. Smucker surpasses both metrics which means it’s a world class business operation.

This shows the power of the company to survive and thrive – even during the worst economy we’ve seen since at least the end of World War 2.

But because of its business model it has a ton of debt.

Kinder Morgan Has A Huge Amount of Debt

Because of its business model in owning and operating pipelines for oil and liquid natura gas… Kinder Morgan has a huge amount of debt.

Why?

Because the constant need to buy, upgrade, and maintain its pipelines is extremely expensive.

As of this writing KMI has $1.18 billion in cash compared to $34.7 billion in debt.

As a percentage of its balance sheet total liabilities make up 56.08%. 

Debt makes up a gigantic 93% of its market cap.

And its debt-to-equity ratio is 1.02.

Most of the metrics look okay… But its absolute dollar amount of debt is enormous compared to its size.

This is one illustration of why you can’t just rely on metrics when searching for investment.

Because of its constant need to invest and reinvest in its business its debt levels are enormous for its size.

Plus, its also issued a ton of shares in the last decade to fund this growth and reinvestment as well.

From 2011 to today in 2021 its share count is up 220% from 708 million shares to 2.263 billion shares.

All else remaining equal this means Kinder Morgan shares are worth 220% less now than they did in 2011.  Think of dilution like inflation – but for stocks.

This is a huge reason its stock is down 44.2% in the last decade while its revenues and profits are up.

This debt is enough to keep me from recommending Kinder Morgan to you.  But let’s finish this out and see if its cheap or not?

Kinder Morgan IS NOT Cheap…

With the markets at or near all-time highs you’d expect what was a fast growth high dividend paying stock like Kinder Morgan to be selling at an enormous valuation.

Unfortunately, it is.

As of this writing its P/E is 330.6.

Its P/CF is 8.2.

Its forward P/E is 18.4.

And its enterprise value to operating income – EV/EBIT is 20.3.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These metrics combined show that Kinder Morgan is massively overvalued right now.

And this means owning its stock does not give you a large margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With Kinder Morgan being overvalued right now, its stock does not offer you a large margin of safety.

This means you should avoid its stock due to its valuation and debt levels.

Conclusion

If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – consider investing in one of the stocks below.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

Comments are closed.