KMI Stock: Here’s Why Warren Buffett Is Buying Kinder Morgan Stock

KMI Stock1 Reason to Be Bullish on KMI Stock

It’s one of my favorite ways to invest in the energy industry and apparently billionaire Warren Buffett agrees: Kinder Morgan Inc (NYSE:KMI) stock.

Shares of Kinder Morgan stock are firing on all cylinders this morning after the “Oracle of Omaha” disclosed his stake in the company. But why is smart money suddenly betting on Kinder Morgan?

Warren Buffett’s holding company, Berkshire Hathaway, purchased 26.5 million shares of KMI stock in the fourth quarter of 2015, valued at $395.9 million. (Source: “Berkshire boosts oil bet with Kinder Morgan stake, SEC filings reveal,” CNBC, February 17, 2016.)

He’s not the only one. George Soros and David Tepper are two of the industry bigwigs whose hedge funds stepped up their stakes in KMI stock in the most recent quarter. This sudden interest from three of these heavyweight investors could not have been purely coincidental.

Those who follow the legendary Warren Buffett must be especially familiar with his investment style. The Oracle of Omaha is known for his long-term value investing. He likes to buy undervalued businesses that offer promising value for the long haul. Buffett likes to wait for a promising opportunity to present itself. His favorite time to buy-in is when the markets are giddy and investor sentiment is skittish.

Does Kinder Morgan meet that defining criteria?

Indeed, on all levels!

Falling oil prices have put a major dent in all energy stocks. At the same time, general market volatility has added to this downward pressure. Things have been no different for KMI stock, which has made new all-time lows beginning this year.

Now, Kinder Morgan is the largest energy infrastructure company in the U.S. and needs little introduction. The company owns the most extensive network of pipelines and terminals for natural gas and oil transportation.

But market has unfairly linked the stock with the oil rout. What’s conveniently overlooked is the fact that oil production makes up less than 10% of Kinder Morgan’s revenue mix. The company’s major source of revenue remains natural gas. (Source: “Kinder Defends $3 Billion Payout Cut That Shocked Investors,” Bloomberg, January 27, 2016.

At the same time, being a midstream company, Kinder Morgan makes most of its money by charging fees on its transportation pipelines. In fact, 91% of its revenue is fee-based and the rest is primarily hedged against commodity price movements.

This brings us to its dividend. The company has typically used equity or debt financing for capital expenditures, instead of retaining earnings. Kinder Morgan’s policy has been to pay out virtually all of its earnings in dividends.

The recent dividend cut was part of the company’s strategy to avoid resorting to debt in order to maintain its credit rating. It made perfect sense. Besides, the current dividend yield is still very attractive at 3.3%.

The Bottom Line on KMI Stock

The legendary Warren Buffett probably understands the energy sector more than most investors. Berkshire’s ownerships include a number of oil and natural gas companies. One cannot question his investment prowess.

Kinder Morgan is hands down one of the leaders in the industry. The wrongful fear of low oil prices has caused the stock to fall to levels that make it look like a bargain. Certainly, it couldn’t have missed Buffett’s eyes, as he’s always on the lookout for such bargains.

Long story short: KMI stock is worth a second look following these big bets from the likes of Warren Buffett, George Soros, and David Tepper.