Kinder Morgan Inc: Why Billionaires Own KMI Stock
January 20, 2017
Warren Buffett and T. Boone Pickens Are Bullish on KMI Stock
One company that investors should take a serious look into is Houston, Texas-based Kinder Morgan Inc (NYSE:KMI) stock.
Kinder Morgan is one of the largest pipeline companies in the U.S., with operations across North America. Due to its size there are a countless number of shareholders that own a piece of KMI stock. In fact, the list of investors that own a larger piece of the company includes two notable names: billionaires Warren Buffett and T. Boone Pickens.
Considering these billionaires’ histories and other investments, their buying of KMI stock makes sense. Let me explain why Warren Buffett and T. Boone Pickens own KMI stock and why you should consider making a similar investment.
Protected High Margins
KMI stock has very high profit margins—even higher than the industry average. Typically, when a business has high profit margins, there are others looking to start a similar business and generate equally high profit margins. However, KMI stock operates in an oligopoly, an environment that does not see much new competition, if any. Instead, competition comes from existing businesses that are likewise expanding their current operations.
The number-one reason for an oligopoly is because the pipeline sector requires a large amount of capital to enter. These funds are needed for constructing of the pipeline and acquiring permits and land rights. An experienced management team to run the business is also necessary, and very rare to find.
Another reason for the protected high margins is the services provided by Kinder Morgan being inflation-indexed. Over time, the cost of using the pipeline will increase, which would be reflected in the bottom line.
Future Growth Project
High margins aren’t the only reasons why Warren Buffett and T. Boone Pickens have invested into KMI stock. Just a few months, ago the Canadian government approved the Trans Mountain project, which will eventually prove quite profitable for Kinder Morgan. The expansion as a result of the project will add approximately 980 km of new pipeline. (Source: “Expansion Project,” Trans Mountain Expansion Project, November 29, 2016)
Scheduled to be finished in 2019, it will serve as a safer and more efficient method of moving oil in Canada’s west coast. Only the one pipeline will be required, replacing 1,400 tanker truckloads and 441 tanker railways. For oil companies, the pipeline will be the preferred method because of the time and money savings.
The current pipeline transports 300,000 barrels per day, which will nearly triple to 890,000 barrels upon the expansion’s completion. As shareholders, the Trans Mountain project is definitely something to look forward to. (Source: Ibid.)
Dividend
One action that investors never want to see is a dividend cut. But while KMI stock experienced such a cut about a year ago, it should be looked at as a positive. Why? Because it shows a focus on on making Kinder Morgan fundamentally stronger.
The focus has been on reducing the overall debt of the company, which has been going down since the dividend cut took place. Investors were told that once the balance sheet is leaner, then dividend hikes and share repurchases would be likely. Cash flows are also expected to increase once the Trans Mountain Project is completed. (Source: “Kinder Morgan Declares Dividend of $0.125 for Fourth Quarter 2016,” Kinder Morgan Inc, January 18, 2017.)
KMI stock currently pays a dividend of $0.125 on a quarterly basis. The dividend yield is 2.21%, given the current trading price of $22.41.
Final Words on KMI Stock
Kinder Morgan’s corporate team is focused raising the stock’s value and appeasing shareholders, as evidenced by efforts to strengthen the balance sheet —this sheet is the lifeblood of the company. Over the long term, patient, long-term investors should benefit from the efforts.
This is why the likes of Warren Buffett and T Boone Pickens have a large position in KMI stock. Based on these men’s successful history of investing, KMI stock should be seriously considered as a worthy investment.
