Can someone explain to me why KMR's stock dividend is not dilutive. The cash dividend of KMP looks a lot more attractive to me. I have always been under the impression that a stock dividend just increased the number of shares outstanding and wasn't really worth much. I can tell by the comments on this board that people on this board don't believe this. What am I missing? Thanks.
KMP and KMR shares are sold often several times a year to raise cash for projects since there is little or no retained earnings. The KMR payment in share reduces the number of shares they need to sell. They also borrow more when there is more shares and the money is used for expansion so not much dilution.
About a year ago Mr Kinder said they were going to increase the KMR shares so that expansion would not require stock sales. KMR's non cash distribution would provide the cash build up.
First, I assume you know that KMR's only assets are i-units in KMP which are equivalent to regular units, except that the i-units don’t get any cash distributions and don’t get any allocation of taxable income. Instead, each quarter, KMP pays additional i-units to KMR equal to the value of the cash distribution that KMP pays to outside unit holders. This is what makes KMR's share distributions not dilutive - the additional shares are covered by the additional i-units.
Normally, a stock dividend just divides a company’s existing net assets by additional shares, so it’s dilutive. But with KMR, the distribution received from KMP grows the asset base, so there's more assets to cover KMR's outstanding shares. I’m making this sound more complicated than it is. But consider the most recent quarterly distribution - $ 1.26 to be paid by KMP. KMP did not pay this cash distribution to KMR; instead it paid $ 1.26 worth of i-units to KMR for each i-unit KMR already owns. So KMR now owns $ 1.26 more i-unit value. KMR then distributes $ 1.26 in new shares to its shareholders. So the extra shares are covered by the extra i-units.
Thank you for your explanation. I wasn't thinking of the expansion of the asset investment units covering the amount of the distribution which would not make it dilutive. It makes sense now. KMR looks like a great way to invest in pipelines.
When the KMR stock dividend is paid, it is dilutive. Same for secondaries for KMR and KMP. A 1 share distribution of KMR stock is currently worth $74.77.
KMR currently "yields" 6.73% using current prices and the KMP disitribution of $1.26. KMP yields 6.10%. I invest in KMR for the long term and trade KMP. I currently only hold my core position in KMR, nothing else in the Kinder Morgan universe.