OT.
Thanks Spekulatius. Some interesting comments there, especially the following ....
"If the company wants to enter into long-term contracts with other companies, those other companies don't want counter party risk. So too much debt will affect how profitable the business is, because the company will have to give a discount on its long-term contracts so that its counter parties are compensated for their counter party risk."
It seems someone else has picked up on the aspect of 'Debt'.
Speaking for myself, I like to keep it simple when looking at a company's performance.
At the end of the day how do investors earn from their share purchase ?
I'd say it's really only from Dividends and/or from Capital Gain, where the former is as a result of that company's Bottom Line.
As you say, KMI's business model of an MLP utilizes debt as part of its 'capital structure'.
That's OK .... but isn't it also a question of how much debt, and what that is doing in terms of eroding its EBIT and eventually its Dividend producing Bottom Line ?
As we've seen Debt Cost has been wiping out an average of 45% of KMI's EBIT, on an Ongoing Basis, which is why I made my original comment.
Isn't there, perhaps, an alternative modus that KMI could resort to in order to finance its ownership of " low risk and stable long life cash generating assets"?
The one possibility that obviously comes to mind is to issue shares to gain more Capital. Yes, this increases shareholding and possibly reduces dividends per share, but it costs less, in the long run, relative to the ongoing, and possibly increasing, interest rate expense.
Maybe a combination of some debt, whose Interest Expense (say 25% to 30% of EBIT) doesn't have too severe a reduction of its EBIT, as well as the issue of more shares. All done in the interest of producing more Bottom Line profit and eventually increasing Dividends.
The following equation, I'm told, represents an indication of the once-off cost of KMI issuing new shares based on its parameters .....
investopedia.com
Cost of Newly Issued Stock, K =(D/P(1 - F)) + g , where ....
D = Dividend = ~$1.65
P = Share Price = ~$32
F = Flotation Cost = (say)5%
and g = Growth Rate = (1 - Earning's Payout)(ROE), where, from Yahoo Finance, ....
Earning's Payout = 136%
ROE = 10.3%
Putting all of the above into the "equation blender" we get K = ~1.7%, which is a once off cost and which should cost KMI a lot less than its ongoing Interest Expense.
In that way wouldn't KMI probably have more left over at its future Bottom Lines, which should add to its Retained Income, from which it could then purchase "cash generating assets" with its own money and not pay someone else for the privilege, .... and probably also, eventually, boost Dividend payouts ? |
