Today we have a speculative idea: take shares of the Kinder Morgan pipeline network (NYSE: KMI), in order to make money on the inflow of dividend investors into its shares.
Growth potential and validity: 15,5% behind 12 months excluding dividends; 26,5% excluding dividends for 2 of the year; 8% per annum during 10 years including dividends.
Why stocks can go up: because the company has big dividends, and the environment for its business has recently improved significantly..
How do we act: take now 17,23 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
Yesterday a very detailed analysis of the company's business was released.. I'll just repeat the main points.:
- KMI manages a wide network of oil and gas pipelines and terminals.
- Gas transportation gives 65% company revenue.
- Transportation of liquefied natural gas (SPG) gives 45% company revenue. This gas can be exported on ships, not through pipes, which is very convenient for countries, in which it is not possible to conduct a gas pipeline.
Arguments in favor of the company
Suddenly profitable. Analysis of KMI was written in the world, slightly different from that, in which we live now. Well-known events have led not only to an increase in energy prices – they have made large investments in oil and gas production possible and extremely marginal., what I already wrote about in the idea for Caterpillar. LNG seems to be especially promising here., transportation of which plays an important role in KMI's business.
At the center of the American strategy for economic pressure on the Russian Federation is LNG. Russia is understandably the leading supplier of gas to the EU, and gas is of critical importance for Europe as to ensure its daily life, and for the ecological transition.
Gas is a relatively clean fuel, which can replace coal and other non-environmentally friendly energy carriers until the moment, When will renewable energy become mainstream?. All in all, nowhere without gas. And moreover, without Russian gas, there is nowhere to go.: the rise in gas prices in early January put European consumers in a difficult position - for example,, the ancient business of Venetian glassblowers is under threat.
In theory, it is possible to replace Russian gas with American LNG – of course., at higher prices. But it's very difficult to do it physically.: U.S. LNG production and transportation capacity is almost fully loaded, and 70% world contracts for the delivery of LNG concluded on 10 years ahead. Means, American companies will increase production and export capacities. And this is, in its turn, bring sustainability to KMI's business.
Of course, the growth of margins of other types of raw materials will also help improve the situation for KMI's business, but the main point of growth of the company seems to me to be a politically motivated increase in the export of American LNG..
Also, Taking into account all the points mentioned, it is quite possible to inflow investors into these stocks, those who want to make money on LNG. Very likely, that it will be Western companies and investors, oil and gas projects in Russia that are now abandoned. If Europe switches to other energy sources – primarily LNG, but also clean energy sources, - then by 2030 the EU will be able to replace 93% russian gas exports.
Dividends. The company pays 1,08 $ dividends, which gives a very large profitability — 6,2% per annum. Taking into account the above points, enough investors will run into the company's shares., who want "normal passive returns", but only so that the risks are not very large". KMI has the risks of reducing payments, like all stocks with a large dividend yield. But in general, most of the company's business is quite predictable and stable., and the improvement of the situation in the oil and gas industry will fuel this stability.
Can be more expensive. The company's shares have fallen since 22 to 17,23 $. Considering, that the financial position of the company is now significantly better, than at the beginning of the pandemic, we can expect stocks to return at least to pre-pandemic levels.. And this is even without taking into account the positive conjuncture.. So the rebound of these shares seems to be quite reasonable..
What can get in the way
Reliability and stability. Surprisingly, pleasant predictability of the company's business has an unpleasant side: almost 2/3 its income is formed on the basis of long-term fixed contracts, which somewhat offsets the positive effect of energy prices, – a sharp jump in the profitability of the company's business in the next six months to a year should not be expected. Though I'll be happy to be wrong..
Accounts, accounts... In the review, I talked about the company's debts – $ 38.495 billion in debts, of which 5.821 billion need to be repaid within a year. The company does not have a lot of money in its accounts - 1.14 billion, and there are still 1.611 billion debts of counterparties. ALSO, KMI suffers "on paper" losses, related to the loss of value of assets. But its business depends on the state of its infrastructure capacity.. So in the reconstruction and expansion of the business, she will have to invest a lot of money..
There might come a moment, when the company will have to cut payments for the sake of implementing an investment program and closing debts. In this case, the company's shares will fall sharply., because the lion's share of their attractiveness is based on dividends..
What's the bottom line?
We take shares now by 17,23 $. Then there are three options:
- wait for the stock to rise 20 $. Think, we can expect such growth over the next few years. 12 Months;
- wait for the stock to return to 22 $;
- keep shares next 10 years and receive payments.
Considering, that dividends play a decisive role in the case of these stocks, you need to carefully follow the news section on the company's website. If news about the reduction in payments appears before the market opens in the US, then you can have time to sell shares on the "SPb-Exchange" before that, how Americans will react to this news, and after them, the bulk of investors on the "SPb-Exchange".
