·
Kinder Morgan
board of directors just approved a $100M warrant repurchase program.
·
Management is
signaling confidence that the common would trade above $42.79 when warrants
expire.
·
The total return
at that price-level is projected at ~20%, a decent outcome.
On June 12, 2015, Kinder
Morgan filed a regulatory 8K report
disclosing board approval for a $100M warrant repurchase program. This is a
notable about-turn as in the Q4 2014 earnings call on January 22, 2015, Richard Kinder said the
following in reply to an analyst question about whether the company is
considering stock or warrant buybacks in the open market:
“No, that’s not in our present plans. Again, what we have said is that
we’re going to concentrate on this tremendous dividend growth story that we’ve
got and be very careful about maintaining our investment grade rating by
keeping -- by paying close attention to and keeping that debt to EBITDA in the
range that we have talked about over the last six months.”
These warrants were issued
in May 2012 as part of the El Paso acquisition. At the time, 505M warrants (5-year
term, Exercise Price $40) were issued and they were valued at $863M ($1.71 per
warrant). As of Q1 2015, the outstanding warrant count is at 289M shares: ~43%
reduction primarily through periodic repurchases. The repurchase activity over
that timeframe follows:
*** The warrants remaining do not tally because of
conversion of certain preferred shares and exercise activity.
*** $98M, $465M, and $157M worth of warrants were repurchased
in 2014, 2013, and 2012 respectively.
*** In addition, repurchase activity included the
following in the common during the timeframe: $94M and $172M worth of class P
shares in 2014 and 2013 respectively.
The cost of the warrants to
the business would be zero, if the stock trades below $40 (assuming no
adjustment to the exercise price) at expiry. Otherwise, the cost would be the
price-premium above $40 per share multiplied by the warrants outstanding. For
example, if at expiry there are 250M warrants outstanding and the stock trades
at $45, the cost of the warrants to the business would be $1.25B. The present
value of that future cost will be $1.13B at a 5% interest rate. If management
confidence level is high for the stock to trade above $45 at expiry, it would
then make sense to repurchase the warrants, as long as the cost is below $1.13B
or $4.54 per warrant outstanding.
Below is a look at implied
management confidence level for the stock price at expiry based on the average
price paid per warrant on the buybacks so far:
The confidence level has been
in the $41.50 to $45 price-range throughout. Currently, the warrants are
trading at $3.08 and assuming management follows through and buys back at ~$3
average-price, the confidence level for the share price at expiry is $42.79.
That is a modest ~8.7% increase from the current price. Adding the $4.50 in
dividends projected will bring the total return to ~20.2%.
KMI is a relatively stable
dividend growth stock with a high initial dividend yield of ~5% and expected
return of at-least ~10% per year for the next two years. As such, it is a good fit for income portions of
diversified investment portfolios.
