InvestingDaily.com

Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.



Close
FEATURED STRATEGY

How To Collect Your Share of My Million Dollar Giveaway

How To Collect Your Share of My Million Dollar GiveawayWe recently kicked off the most outrageous initiative in the history of investment research. It’s called the Income Millionaire Project. And the goal is simple: create 1,000 income millionaires. That’s a $1 billion goal! No one has ever tried it before, but that doesn’t bother me. I’m so sure you can use this program to make a million bucks… I’ll pay you $1,000 to start your journey. Go here for details.

 

That’s One Ugly Convertible

By Igor Greenwald on July 26, 2017

The energy sector has been a market laggard for years, but it never seems to run out of investment propositions that are too good to last, nor of investors who buy them regardless.

Last week, I discussed a midstream infrastructure fund with a crazy high yield and tax issues that will bite its owners sometime in the future.

This week, it’s the turn of another double-digit energy midstream yield. Only this one has a clear sell-by date.

In October 2015 energy pipeline giant Kinder Morgan (KMI) marketed a mandatory convertible preferred issue to raise badly needed capital. One of its subsidiaries was facing  a credit downgrade, it already had too much debt on its books and it didn’t want to issue more common equity. In retrospect, given what its shares fetched then and what they’re worth now, it would have been wise to do so.

Instead, Kinder raised $1.6 billion from preferred shares yielding 9.75% annually at face value. On Oct. 26, 2018 these Series A securities (KMI.PRA) will convert into KMI common stock. The kicker is that the conversion price will be at least $27.56 per KMI common share, equivalent to where the common traded when the convertibles were issued but 34% above the recent price of $20.48 for the KMI common.

Which means that, barring appreciation in excess of 34% over the next 15 months, that $50 face value of the convertible preferred will turn into 1.8 common shares. At KMI’s recent share price that would be worth $37. Add in the $6.09 in preferred dividends still to be paid, and you only get to $43 or so, still less than the preferred issue’s current price of $43.73. People buying at this price are getting full exposure to the downside of KMI’s common stock but only partial exposure to the upside, given the currently unfavorable conversion ratio.

The bottom line here is that income investors can’t afford to be dazzled by a shiny yield with strings attached. If you’re a bull on Kinder Morgan’s prospects relative to those of other pipeline operators, you’re much better off buying its common stock.

Me, I’ll stick with a much smaller midstream MLP currently yielding 12.5% and with a realistic shot at lowering that number dramatically through capital appreciation. It’s a risky investment, of course. But the upside isn’t capped the way it is with the KMI preferred.

For more on this and other promising income investments, join us at Income Millionaire.


You might also enjoy…

 

R.I.P Bull Market—Here’s How To Protect Your Wealth

I hope you’ve enjoyed the phenomenal bull market of the past eight years…

Because it’s about to come to a screeching halt.

The Federal Reserve’s nearly decade-long spending spree has finally come to an end.

With no other options left at their disposal, the Fed has no other choice than to raise interest rates to keep inflation in check.

And that leaves you with two options…

Do nothing and suffer the agony of watching the profits you’ve accumulated over the years evaporate right before your eyes…

Or reposition your portfolio and invest in companies which prosper as inflation rises and interest rates soar.

I think the choice is clear. And I’ll show you the best new positions you can take if you click here.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.