Kinder Morgan cuts dividend 75 percent

Kinder Morgan Inc. signage is displayed at the company's facility in Richmond, California, U.S., on Friday, Nov. 21, 2014. (David Paul Morris/Bloomberg)
Kinder Morgan Inc. signage is displayed at the company’s facility in Richmond, California, U.S., on Friday, Nov. 21, 2014. (David Paul Morris/Bloomberg)

HOUSTON — Pipeline giant Kinder Morgan slashed its dividend by 75 percent Tuesday as the company attempted to quiet fears about its finances.

The move could head off investor’s questions about Kinder Morgan’s liquidity and creditworthiness that have driven the Houston-based company’s stock down by 60 percent over the past three months and touched off a wider midstream stock-price collapse.

The cut will leave Kinder Morgan with a large amount of cash that it otherwise would have paid out to investors as dividends. The extra cash cushion means Kinder Morgan won’t have to fund the billion-dollar construction budgets for new pipelines by selling shares of its devalued stock or by loading more debt onto its already strained balance sheet.

But the added security the company will gain by funding its own growth comes at a steep cost.

The steady dividend has been Kinder Morgan’s hallmark since it went public in February 2011, and executives repeatedly have touted their track record of increasing the dividend each quarter — 15 times as of the most recent count — as a measure of the company’s success.

Investors have traditionally valued the stock using the yield it provides. Previously, even the suggestion that the dividend might be cut has led to steep losses.

“We evaluated numerous options, including significant asset sales, but ultimately concluded that these other options were uneconomic to our investors in the long run. This decision was not made lightly, but we believe it is in the best interests of the company, its shareholders and employees,” said Richard Kinder, executive chairman of the Kinder Morgan board, in a written statement.

“It will allow us to continue to maintain and grow our outstanding set of midstream energy assets without being required to issue equity at valuations prevalent in today’s market while maintaining a solid investment grade rating on our debt obligations.”

Midstream companies such as Kinder Morgan historically pay their cash flow to investors and fund new growth using an equal mixture of equity and debt.

Before Tuesday’s meeting, Kinder Morgan had planned a 6 percent to 10 percent bump next year in its dividend, which now is $2 per share annually.

But with share prices trading near all-time lows and dividend yields rising to near 13 percent, Kinder Morgan decided that the money it could raise from selling equity wasn’t worth the dividends it would have to pay on the newly issued shares. Simultaneously, the company said it would reduce its leverage by paying down debt in order to maintain its investment grade ratio — essentially ruling out debt as an option.

Investors, seeing the company swear off both equity and debt, began to sell their shares amid worries that Kinder Morgan would fund growth by using the $5 billion in 2016 cash flow that it typically had earmarked for dividends.

The selloff accelerated on Dec. 1 when debt ratings service Moody’s threatened to downgrade Kinder Morgan’s credit rating shortly after the company said it would increase its stake in a debt-laden affiliate. A downgrade would push Kinder Morgan onto the high-yield or junk credit markets, increasing its cost of capital.

Kinder Morgan announced it was reviewing its dividend policy shortly after.

The company announced the dividend cut after U.S. markets closed, with Kinder Morgan ending down 70 cents at $15.72 a share.

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