The Money Tree

Safely Generating Income in Retirement

New Investment – KMI

Posted by mounddweller on March 30, 2018

Fellow Investors,

Over the past few weeks I have been looking to make one or two opportunistic additions to my long-term investment portfolio.  In a previous post I mentioned an interest in IBM and OKE.  I still have both of these on my radar screen.  However, my interest in OKE and the fact that mid-stream O&G companies in general have fallen out of favor on Wall Street led me to expand my research.  In addition to OKE, I also began to keep an eye on ENB and KMI.

All 3 companies are leaders in the mid-stream space of the O&G industry.  While I really like OKE, I decided to do more due diligence on ENB and KMI because, in my opinion, they represented a better value.  Then, after comparing ENB and KMI, I decided I liked KMI just a bit better than ENB for the following reasons:

(1) ENB pays dividends in Canadian dollars, thus there is a currency risk,

(2) KMI is further along in strengthening its balance sheet.

Thus, last week when it appeared pessimism was at a peak I made two trades.  First, I bought 200 shares of KMI at $14.84 per share.  Second, I STO 2 KMI SEP 15 puts at $1.30.  KMI currently pays a $0.50 dividend.  Thus, my initial dividend yield is 3.37%.  Nothing to get too excited about, right?  However, if you’ve followed KMI in the past you know that they have had a few rough years.  They grew too fast and incurred too much debt.  As recently as 2014 KMI had paid quarterly dividends at an annual rate of $2.00 per share.  In order to restructure their balance sheet and get back in the good graces of the analysts on Wall Street, they cut their dividend by 75% and used the savings to pay down debt and become self-funding.  By that I mean their plan going forward is to fund all of their future growth out of existing cash flow without having to access the debt or equity markets.  Having done that for the past couple of years KMI is now positioned to again begin growing its dividend.  For 2018, they have announced plans to increase the dividend from $0.50 to $0.80.  Barring unforeseen events the plan calls for further increases to $1.00 in 2019 and $1.25 in 2020.  If these plans come to fruition my yield on cost in 2020 will be a very impressive 8.42%.

Now, let’s take a look at the puts I sold.  As referenced above, I STO 2 KMI SEP 15 puts at $1.30.  I decided to sell these puts for a couple different reasons:

(1) I wanted to leg into a full position in KMI over time, and

(2) the relatively high VIX gave me an opportunity to make a higher ROIC than if I had just bought another 200 shares of stock.

Since these are cash secured puts my ROIC is 8.67% (1.3/15).  That is significantly higher than 5.39% (0.8/14.84) return I would have gotten had I just purchased the shares outright.  Better yet, my annualized return on the puts is 17.57%, since my maximum holding period is only 180 days.

If I have KMI shares put to me in SEP at $15, my cost basis will only be $13.70.  This will give me a yield on cost of 5.84% in 2018, 7.30% in 2019, and 9.12% in 2020.

At these prices and rates of return I am very happy to have added KMI to my long-term portfolio.  I am continuing to keep an eye on OKE and hope to make an equally attractive entry in it later this year.  I’d like to own OKE at $45 or less.  Thus, it will take a bit more volatility in the market before I can hope to achieve this price target.

Best Regards,

Troy

 

 

 

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