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Thoughts on Kinder Morgan After the Barron’s Blast

Note: This is not intended to be a detailed analysis of Kinder Morgan. It is a blog post in the truest sense: I’m simply thinking out loud, looking for answers admist the noise. 

Barron’s really did a number on Kinder Morgan (KMI) this past weekend (see Kinder Morgan Could Fall Another 20% or More). Barron’s has been down on Kinder Morgan for more than a year and a half now, and some of their caution has certainly proved to be warranted in light of the share price declines of the past year. Kinder Morgan has a lot more commodity-price sensitivity than any of us bulls realized. But after the thrashing the stock has already taken, is more downside likely?

My instinct would say “no.” But let’s take a real look at Barron’s numbers to see if they hold water.

Barron’s Beef With KMI

Much of the arguments against Kinder Morgan focus on its use of non-GAAP accounting, which is typical of MLPs. Of course, Kinder Morgan is not an “MLP,” per se, but a corporation that happens to be in the same line of work, in this case midstream oil and gas pipelines.

Following MLP convention, Kinder Morgan bases its dividend payout on “distributable cash flow” as opposed to net income or free cash flow. Distributable cash flow (which is a metric unique to MLPs) takes net income, adds back in depreciation and other non-cash expenses, and then subtracts maintenance capital expenditures. The idea is that this is the cash profit thrown off by existing operations that can be paid out to shareholders. Capital expenditures for expansion are funded by new debt and equity issuance.

In contrast, the more conservative “free cash flow,” which (though also non-GAAP) is a more traditional way to measure a company’s ability to pay a dividend, makes no distinction between maintenance capex and expansion capex. Free cash flow is the cash left to payout to investors after all capital expenditures. (There are also other accounting differences, but for our purposes here this is sufficient.)

So, distributable cash flow might sound like dodgy accounting for a corporation, but we need to remember that Kinder Morgan is an MLP in all but name, so it makes sense to use the same accounting metrics.

Barron’s further takes issue with how Kinder Morgan allocates its capital expenditures between maintenance and expansion capex, essentially accusing Kinder Morgan of fudging the numbers, masking maintenance as expansion as a way of boosting the funds available to pay the dividend.

Barron’s failed to present a smoking gun, however. Kinder Morgan has consistently accounted for capex the same way for years, and the sort of short-termism that Barron’s alleges is very out of character for Kinder Morgan and its founder, Richard Kinder. If Kinder and his team were looking to inflate short-term results to boost the share price, then they wouldn’t be spending tens of millions of dollars of their own money buying shares on the open market. Richard Kinder and his team have an enormous chunk of their collective net worth in KMI stock. Sure, they can make legitimate business mistakes. Every executive team does. But it seems farfetched to accuse this executive team of running a multi-year pump and dump scam.

Much of this week’s hatchet job comes from Hedgeye’s Kevin Kaiser, a long-time Kinder Morgan bear. Kaiser values KMI at a ludicrous $13 per share, which would price it at less than accounting book value. The fact that Barron’s bothers to quote Kaiser here erodes credibility. Nonetheless, let’s dig into the numbers.

Comparing KMI to its Peers

By Barron’s estimates, KMI shares are trading at 14 times EBITDA. Using the current stock price of $26.82 and a trailing 12-month EBITDA of $3.04 (courtesy of GuruFocus), I get a multiple of just 8.8 times EBITDA. And using the more common multiple of EV to EBITDA, I get a multiple of 17.7. So, I’m really not sure where Barron’s is getting these numbers.

Ignoring that for the moment, let’s compare Kinder Morgan both to some of its large MLP peers and to some of the larger utilities, as Barron’s does:

StockTickerEV/EBITDA (trailing 12 months)Price/EBITDA (trailing 12 months)Dividend Yield
Kinder MorganKMI17.78.87.5%
Enterprise ProductsEPD15.412.15.6%
Plains All AmericanPAA10.95.98.8%
Energy Transfer EquityETE17.06.15.3%
Duke EnergyDUK9.75.44.6%
NextEra EnergyNEE9.25.33.0%
Dominion ResourcesD13.28.03.6%

The table above includes four of the largest and most widely held MLPs and the three largest American utilities by market cap. Does Kinder Morgan seem uniquely expensive compared to these peers?

Hardly. KMI’s EV/EBITDA multiple is in line with Energy Transfer Equity (ETE) and only slightly higher than Enterprise Products (EPD). Only Plains All American (PAA) is noticeably cheaper, and Plains has some highly-publicized growth issues.

The utilities stocks are significantly cheaper, but even Barron’s concedes that this should be the case given the typical slow growth of the utilities sector.

Now, I suppose you could argue that MLPs as an asset class are a bad bet. But it’s hard to credibly argue that Kinder Morgan is somehow uniquely overpriced or particularly risky. Yet that is precisely what the Barron’s article does.

What Are The Risks?

To be fair, Kinder Morgan is not without risk. Its ability to deliver on its growth targets depends on its access to capital. Because Kinder Morgan pays out most of its earnings as dividends, it has to issues debt or new stock to fund growth projects.

So, KMI’s biggest risk — in the circular logic of the market — is its low stock price itself. A low stock price makes equity issues extremely expensive and dilutive to existing shareholders. So, we could legitimately have the self-fulfilling prophecy unfold in which a falling share price actually causes growth to slow.

I don’t see that happening. In fact, I see shares doing quite well in the months ahead after the beating they’ve taken. But, unlike most of the financial press these days, I try to be balanced…

Disclosure: Long KMI, EPD, ETE

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.



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The Case for Mortgage REITs

2015 has been unkind to the mortgage REIT sector. The iShares Mortgage Real Estate Capped (REM), a basket of the largest and most actively traded mortgage REITs, is down a little over 8% year to date. Including the large dividend, that loss shrinks to about 4%. But it’s been a rough ride, and I haven’t seen any indication that it’s over. This is every value investor’s frustration: A cheap sector that just keeps getting cheaper.

Consider the case of Annaly Capital Management (NLY), the largest m-REIT by market cap. Annaly has spent virtually its entire history as a public company trading above its book value — as it should. As an investor, you should be willing to pay a modest premium for Annaly’s management expertise and its low cost of capital.

But in 2012, something changed. Investors became less and less willing to pay up for Annaly’s shares, and they pushed the price into discount territory. That discount has been widening ever since, and today Annaly trades for just 80 cents on the dollar.



A discount to book value would imply that management is actually destroying value. And hey, plenty of management teams actuall do destroy value. But it’s hard to argue that the management teams of the entire sector are destroying value, and yet that’s what market prices currently imply (see slide 31 in my last client presentation).

So, what gives? Why is the market pricing in such doomsday valuations?

You can blame it on two factors:

  1. The flat yield curve of recent years caused m-REITs to reduce their dividends. Remember, m-REITs borrow short-term and lend long-term, so a flat yield curve reduced the funds available for dividends. Investors, burned by a cut dividend, have responded by dumping the stocks.
  2. Fear of the Fed is playing a role as well. Investors…despite all evidence to the contrary…still seem the think the Fed will aggressively raise rates in the months ahead. Higher short-term borrowing costs will further crimp dividend payments.

So, what should we do about it? Are m-REITs worth buying at these prices, or is Mr. Market correctly pricing in risk?

I’ll allow DoubleLine Capital’s Jeffrey Gundlach to answer that question.In last week’s Barron’s, Gundlach pretty well summed it up:

Annaly is a mortgage REIT [real-estate investment trust]. It buys mortgage securities and leverages them, creating interest-rate risk. But I don’t expect the Federal Reserve to raise interest rates any time soon, and long-term rates are range-bound. [Emphasis Charles]

In this environment, Annaly’s near-12% dividend yield looks stable. Moreover, the price of the shares could rise because Annaly is trading at a substantial discount to the value of its portfolio of assets. The REIT sector broadly has been weak for the past 18 months because of fears the Fed might raise rates.

I agree with Gundlach. Though to be fair, we’ve both been very early to this party. I’ve been writing about the attractive pricing in m-REITs for well over a year now, and Mr. Gundlach was publically praising the sector as far back as 2013. We’ve both been very early to this trade.

Of course, we’re also being paid to wait. Mortgage REITs have continued to pay exceptionally high dividends throughout the turbulence of the past few years. And I don’t expect that to change any time soon.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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101 Dividend Investing Tips


I contributed a couple tips to Jimmy Atkinson’s article 101 Dividend Investing Tips from Experts:

  • The key to getting started is getting started. If you have modest funds, that’s OK. Brokerage commissions are cheap enough these days that you can start with as little as a couple hundred dollars without the commissions eating too deeply into returns. Open an account with a good online broker: I personally prefer Interactive Brokers and TD Ameritrade. And then, just do it. Get your feet wet. Buy that first stock.
  • In investing over the long-term, you really win by not losing. Keep your fees, trading expenses, and taxes to a minimum. Avoid wildly speculative investments that have the potential to blow up. Keep your position sizes reasonable; I recommend weighting individual stocks no more than about 5% of your overall portfolio. Doing just these basic things will get you a good way towards financial success. Stock picking really becomes secondary.
  • The characteristics that make a good dividend stock are remarkably unsexy. You want reliability and longevity. The longer a stock has paid its dividend without cutting it, the better. I had a general rule of thumb that is getting a little bit dated now, but it’s still pretty valid: What did the stock do in 2008? If the company continued to pay its dividend throughout the 2008 financial crisis, then that is a stock that can survive the end of days. As a general rule I like stocks that have paid a consistent dividend for at least five years (10 years is better). And I want to see average dividend growth of at least 5% per year over that time period.
  • Keep the most tax inefficient investments in an IRA if possible. This would include bonds, precious metals and stocks that you intend to trade regularly. Positions that you intend to hold for long-term capital gains (think index funds) and that generate minimal current income can be held in regular taxable accounts.
  • Avoid acting impulsively. Nearly every mistake I’ve ever made came from acting emotionally without thinking through the details rationally.

To read the full article, click here.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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Note to Alphabet: Stop Being Such a Baby and Pay a Dividend


Note to Alphabet (GOOGL)… or Google… or whatever you choose to call yourself these days: It’s time grow up, wear your big-boy pants, and start paying a dividend.

You’re a $500 billion company, for crying out loud, and your biggest rivals — Apple and Microsoft — are among the most generous dividend payers and dividend raisers in the world. For a company that used to pride itself on its “Don’t be evil” motto, your stinginess to your long-suffering shareholders seems a little…well…evil.

Is a dividend really too much to ask? Let’s look at the numbers. Companies with consistent and reliable cash flows make the best dividend payers. Remember, investors who buy for dividends tend to be conservative. They hate surprises, and lumpy earnings make for an erratic dividend.

So, Alphabet, how do your earnings stack up?

Pretty well, actually. Over the past ten years, earnings per share have grown at a nice clip with no real interruptions. Free cash flow per share, which is the more appropriate measure for gauging cash available to be paid as a dividend, has been a little lumpier as capital expenditures vary a little from year to year. But overall, you are a case study in a steadily growing business, Alphabet.

And let’s not forget about your money in the bank. You have $73 billion in cash just sitting around. That’s about 14% of your entire market cap. Seriously, what are you going to spend it on, driverless cars? Well, your $73 billion in the bank is nearly three times the entire market cap of leading auto innovator Tesla Motors. You could buy Tesla outright and still have plenty of cash left over for at least a modest dividend.

Yes, you gave us investors hope by announcing a $5 billion share buyback. And really, thanks. Much obliged. But that’s just not going to cut it. There is no precise timeline on the share repurchase, and even if you were to make the entire purchase tomorrow, what would it accomplish? That’s not even 1% of your market cap. That felt like more of a condescending pat on the head than a real effort at shareholder friendliness.

So, what would an Alphabet dividend look like? Let’s take baby steps and start with a 10% dividend payout. You earned $5.1 billion this past quarter. $2 billion initial annual dividend (or $500 million quarterly) wouldn’t make a dent in your cash hoard, and it would go a long way towards making your shareholders feel warm, fuzzy and generally cared about.

And don’t think that paying a dividend will completely negate your ability to throw money away on silly acquisitions that add no value to shareholders. Being a generous dividend payer certainly didn’t keep Microsoft from blowing $2.5 billion buying the maker of Minecraft last year… which is the corporate equivalent of a child blowing his weekly allowance on gummy bears.

I know, I know. It’s hard to admit you’re no longer a Silicon Valley startup. I get it. Growing up and being an adult is hard. But you can still let your employees wear togas to work…or sit in beanbag chairs…or whatever it is you free-thinking tech geniuses do over there.

You’re a big boy now. And it’s time to start paying a dividend like one. A dividend would symbolize that you’re a mature company and one that can be trusted to manage shareholder money responsibly.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Photo credit: Harald Groven

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5 Monthly Dividend Stocks to Pay Your Bills in Retirement

We all have bills to pay. And whether it’s your mortgage, your utilities or just that pesky credit card bill, life’s little expenses tend to recur every month.

There’s just one problem with this: If you’re living off of your investments, you normally get paid on a very different timeframe. Dividends are usually paid quarterly, and bond interest is usually paid semi-annually.

I don’t know about you, but I don’t like trying to plan my expenses three to six months in advance. And for a retiree, I can’t think of too many things scarier than running out of money in between quarterly dividend payments.

Well, fear not. I have a solution: Monthly dividend stocks.

Many closed-end bond funds have traditionally paid their dividends monthly, which is nice. It shows that the managers understand their investors and try to accommodate them. But among everyday dividend stocks, it’s still surprisingly rare and usually limited to a REITs and business development companies.

Today, we’re going to look at six solid monthly dividend stocks that can be used to round out an income portfolio.

Monthly Dividend Stocks: STAG Industrial (STAG)

Stag Industrial 185 6 Monthly Dividend Stocks to Pay Your Bills in RetirementI’ll start with a young REIT that I’ve owned for years, STAG Industrial (STAG). STAG is a small-cap REIT with a market cap of about $1.3 billion. That makes it large enough to be diversified but still small enough to fly under the radar of most investors. STAG switched from a quarterly dividend to a monthly dividend in late 2013.

STAG’s business model is simple enough to understand. The REIT invests in single-tenant industrial real estate — things like warehouses and light manufacturing facilities — that tend to require little in the way of maintenance and ongoing expenses. As of the most recent investor presentation, STAG had a portfolio of 253 properties spread across 36 states and 231 tenants, most of which are investment-grade rated.

More than 60% of STAG’s tenants have revenues of more than $1 billion per year, and the 10 largest tenants collectively only account for 15.5% of STAG’s annualized base rent. That’s a conservative profile, which is exactly what you want from one of your monthly dividend stocks.

After the broad selloff in REITs this year, STAG’s monthly dividend yields a healthy 7.2%. And importantly, STAG has been a steady dividend raiser. STAG raised its dividend 4.5% this year after raising it 10% last year. That’s well ahead of the rate of inflation — something that every retiree should keep in mind.

Monthly Dividend Stocks: EPR Properties (EPR)

EPRProperties185 6 Monthly Dividend Stocks to Pay Your Bills in RetirementUp next is a quirky REIT that I’ve highlighted in the past, EPR Properties (EPR). EPR operates in an interesting niche of the real estate market, focusing mostly on entertainment. (“EPR” is short for “Entertainment Properties.”)

With its collection of non-traditional assets, including movie theaters, golf driving ranges and even charter schools, EPR is hard to classify. Most REITs get lumped into a broad sector, such as residential, commercial or office. There isn’t exactly a category for movie, golf and school REITs.

That’s OK. I don’t need for EPR to fit into a neat category box. I just need it to keep paying its monthly dividends!

In fact, EPR’s quirky asset mix works to our benefit, as it a lot of institutional investors frankly don’t know what to do with it. The lack of institutional buying helps to keep the price low and the yield high. Today, EPR yields a fat 6.8%, and the REIT has been a steady dividend raiser for years. Over the past five years, EPR has grown its dividend at a 6% clip. Not too shabby.

As with STAG, EPR switched its dividend payment from quarterly to monthly in 2013.

Monthly Dividend Stocks: Realty Income (O)

RealtyIncome185 6 Monthly Dividend Stocks to Pay Your Bills in RetirementOf course, we can’t have a list of monthly dividend stocks and not mention the “Monthly Dividend Company” itself, Realty Income (O).

In my view, Realty Income is about as close to a bond as you can get in the stock market. It pays its dividend like clockwork every month, and its cash flows are supported by a rock-solid portfolio of high-traffic retail properties.

This stock has made 542 consecutive dividend payments, and I see nothing short of nuclear war or the actual end of days breaking that chain.

But while I consider Realty Income as safe as a bond, its returns are vastly superior. Since its 1994 listing, Realty Income has enjoyed compounded total returns of 16.4% per year. And it has also raised its dividend for 72 consecutive quarters.

I have shares of Realty Income that I keep in my IRA that I have pledged never to sell. My dividends are set to automatically reinvest, and I never look at the account. (Well, I shouldn’t say “never.” Once a year I login just to make sure nothing is wrong.) I intend to leave these shares to my kids someday, and if they’re smart they’ll do the same for their own children.

I expect Realty Income to still be around by then, and still kicking off a fantastic monthly dividend.

Monthly Dividend Stocks: LTC Properties (LTC)

ltc properties 185 6 Monthly Dividend Stocks to Pay Your Bills in RetirementI’ll add one more REIT to our list of monthly dividend stocks: LTC Properties Inc (LTC).

To get an idea of what LTC does, just look at its ticker symbol: “LTC” stands for “long-term care,” making LTC an interesting way to play the aging of the Baby Boomers. More than 8,000 baby boomers turn 65 years old with every passing day, making this a durable trend with staying power.

LTC is a stock you can buy and forget while enjoying a steady stream of monthly dividends.

LTC Properties has a specialized portfolio of properties targeting skilled nursing, assisted living, independent living and memory care. About 20% of its portfolio is also invested in mortgages backed by these kinds of properties.

LTC currently yields 4.9% in dividends. That’s lower than some of our other monthly payers, though still pretty competitive for a medical REIT. And like our other monthly-pay REITs, LTC has a long history of raising its dividend. LTC recently announced a 5.9% dividend hike, and the REIT has managed an 8.6% dividend growth rate over the past five years.

Also worth noting: Unlike most of the REIT sector, LTC’s stock price is actually in positive territory for the year.

Monthly Dividend Stocks: Prospect Capital (PSEC)

ProspectCapitalLogo 6 Monthly Dividend Stocks to Pay Your Bills in RetirementThat’s enough about REITs. Let’s take this list of monthly dividend stocks a different direction, starting with business development company Prospect Capital (PSEC)

I’ve been bullish on Prospect Capital for a while now, even making it my entry in the Best Stocks for 2015 contest. With a little less than three months to go, I’m trailing Rave Restaurant Group (RAVE) by 23%. But anything can happen, and I’m certainly not throwing in the towel yet.

As with closed-end funds, business development companies (BDCs) tend to be held by individual investors rather than institutional investors. This goes a long way to explaining why many are monthly dividend stocks. They’re simply giving their investors what they want.

BDCs can be thought of as publicly-traded private equity firms. They supply capital to small and growing companies that need a little more hands-on attention than a traditional bank is willing or able to provide.

Seeing role as good for the economy, Congress gave BDCs a preferential tax regime similar to that of REITs. BDCs pay no taxes at the corporate level so long as they distribute at least 90% of their earnings as dividends. As a result, BDCs tend to be some of the highest-yielding stocks on the market. Prospect Capital is no exception, yielding 13% at current prices.

Today, Prospect trades at a deep discount to book value, something that has only happened a handful of times in the company’s history. Use this as an opportunity. While you’re waiting for the stock to return to a more normal valuation, you get to collect a high monthly dividend.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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