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URL:  http://boards.fool.com/im-also-long-kmi-frankly-i-have-been-and-am-30859027.aspx

Subject:  Re: first linn now KMP,KMR,KMI Date:  9/6/2013  11:20 AM
Author:  kelbon Number:  16021 of 19983

I'm also long KMI.

Frankly, I have been, and am, wary of the Kinders. I’ll put this down to the fact that I don’t entirely get it and I am not motivated enough to try.

Companies with large piles of debt give me pause anyway. Hello General Electric, perhaps still a great company, but after their liquidity debacle longterm buy-and-holders are still looking at quite a hair cut in the stock price in comparison to the high of 2007: $42.20 a share.

Obviously, some companies have to carry a lot of debt because of the nature of the business, but for all there has to be a tipping point that a misstep might precipitate. In the case of KMI longterm debt is 29 times net earnings. This equation is enough to give me pause, especially in an environment where interest rates can only head up sooner or later.

Although KMI generates positive free cash-flow it far from covers the dividend, and, the dividend payment is about 33% higher than net earnings. Dividend payments that exceed earnings cannot last forever.

There’s a huge amount of goodwill on the books, $23.5 billion, and consequently tangible book value is negative. The company’s return on total capital is anemic.

Even with the recent decline in the share price, the company still seems richly valued with expectations for a rosy future still priced in.

What also gives me pause about the Kinder triad is the possibility of a shell game as assets and liabilities can potentially be passed back and forth. Perhaps these companies are smartly planning for a very profitable future, or, just maybe, they are a house of cards?

kelbon
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