Kinder Morgan's (KMI) decision to cut its dividend by 75% is another blow to longtime shareholders.
On Wednesday, CEO Richard Kinder announced the new regime for Kinder Morgan on a call with analysts. The company's objectives are fourfold: 1) avoid accessing equity markets for the foreseeable future; 2) "substantially reduce" its reliance on the debt market; 3) maintain its investment grade rating; and 4) continue to grow distributable cash flow and use excess to delever its balance sheet and then return money to shareholders via dividends and stock buybacks.
The guidance may be attractive to investors looking to get into the stock. Shares soared nearly 10% after the market opened on Wednesday.
"For investors with a long-term time horizon (at least three to five years), current valuation may provide a good entry point and the relatively modest yield of about 3% (based on the 12/8/2015 closing price) offers some income," Elvira Scotto of RBC Capital Markets said in a note released Wednesday.
However, already bruised longtime shareholders just got beat up again. While Kinder Morgan's recent troubles have been widely telegraphed, investors were also dealt a major tax blow last year when the company moved from operating as a master limited partnership to operating as a C-corp. It's also worth noting that co-founder Richard Kinder was widely considered a champion of the modern-day MLP structure, so him choosing to abandon it raises questions.
"Our idea, Bill Morgan's and my idea, was that we could take (MLPs) and we could operate them very efficiently with laser focus so our whole game would be assets," Kinder said in a 2012 interview with Forbes.
Two years later, he changed course.
"All shareholders and unitholders of the Kinder Morgan family of companies will benefit as a result of this combination," Kinder said in a 2014 statement announcing the new course. "We expect to grow the dividend by approximately 10% each year from 2015 through 2020, with excess coverage anticipated to be greater than $2 billion over that same period."
Fast-forward to today: Not only is Kinder Morgan unable to meet its dividend growth projections from 2014, it actually slashed the dividend. Even worse, unitholders, as they're called under the MLP structure, faced serious tax implications -- both immediate and longer term -- from the transition to C-corp from MLP.
Under the MLP structure, corporations do not pay taxes, instead the unitholders pay taxes. At first glance, that looks like a bum deal for unitholders. However, it is important to remember that under a typical corporate structure, shareholders effectively get double-taxed: first when corporate taxes eat up cash flows that can be given to shareholders and again when they realize capital gains.
A further benefit to the MLP structure for unitholders is that they can often defer taxes on MLP distributions as many are classified as a return of principal. When units are sold, they are taxed capital gains rates rather than the higher ordinary income rates. Granted, the MLP structure comes with administrative complexity, but the higher distributions MLPs are able to pay to unitholders are an enticement.
When the transaction occurred, Kinder Morgan Energy Partners (KMP), Kinder Morgan Management (KMR) and El Paso Pipeline Partners (EPB) were rolled up into the Kinder Morgan umbrella. The exchange of KMR and EPB for KMI stock was deemed a sale of partnership units, and was therefore a taxable event.
"A U.S. holder of KMP or EPB will generally recognize capital gain or loss on the receipt of KMI common stock and cash in exchange for KMP or EPB units," Kinder Morgan posted in an FAQ on their site. "However, a portion of this gain or loss will be taxed as ordinary income or loss."
What all this means for shareholders is that they've taken multiple punches by Kinder Morgan. In 2014, they faced a hefty tax bill due to the conversion from MLP to C-Corp. In 2015, they saw the value of the stock fall 60%, and for 2016, they are finding they won't even get the dividends they were promised.
"While we view the cut as prudent longer-term, we move to the sidelines as we see little catalyst to move shares higher over the coming 12 months and see better total return opportunities elsewhere within our coverage universe," Scotto said.
You couldn't blame long-term shareholders for looking elsewhere if they haven't already.