All-flash rules while Brexit slows UK storage spend, says IDC

All-flash storage arrays continue to chart staggering growth and total shipments, with sales accounting for 31% of all external disk systems in Europe, the Middle East and Africa (Emea) and a growth rate in shipments of 35.8%.

These figures – released in IDC’s Quarterly disk storage systems tracker for the last three months of 2017 – form part of a second quarter in succession that has seen storage spend increase. The UK lags behind other areas of Europe, however, which IDC attributes to Brexit worries putting a freeze on budgets.

Another interesting development is that Chinese hardware maker Huawei has supplanted Hitachi Data Systems in IDC’s top five suppliers by market share.

While all-flash storage is the star of the show, hybrid flash storage system shipments also grew by 19.5%, although their share of total shipments remained static.

Spinning disk-based HDD-equipped storage systems continued to decline in market share, with a shrinkage of 18.9%.

In total, the Western European external storage market recorded growth of 9.8% in monetary terms, while capacity grew by 8.7% to 3,043PB (petabytes).

“IT departments in key Emea countries have resumed investments while progressing into their digital transformation plans, or modernising or refreshing their datacentre in an effort to get ready for key workloads, such as big data,” said Silvia Cosso, research manager in European storage and datacentre for IDC.

IDC attributes weaker IT spending in the UK to uncertainty surrounding Brexit. Recent spending forecasts show IT spend to 2020 being driven by the Nordic countries, France and Germany, with the UK expected to be the fourth weakest in terms of growth for 2017-2018.

According to IDC, the hardware market in the UK shows weak positive expected growth for the forecast period, with strong currency fluctuations cited as a factor and “British demand … underperforming other countries”.

Top disk storage system suppliers in Emea by market share in the IDC fourth quarter 2017 report were Dell EMC with 25% (down 8.5% year-on-year), HPE with 16.67% (up 7.5% year-on-year), IBM on 14.88% (up 41.5% year-on-year), NetApp on 13.86% (up 14.56% year-on-year) and Huawei, which recorded market share of 7.65% (up 137.94% year-on-year) and drove HDS out of the Emea top five.

Bitcoin exchange reaches deal with Barclays for UK transactions

LONDON (Reuters) – One of the biggest bitcoin exchanges has struck a rare deal which will allow it to open a bank account with Britain’s Barclays, making it easier for UK customers of the exchange to buy and sell cryptocurrencies, the UK boss of the exchange said on Wednesday.

Workers are seen in at Barclays bank offices in the Canary Wharf financial district in London, Britain, November 17, 2017. Picture taken November 17, 2017. REUTERS/Toby Melville

Large global banks have been reluctant to do business with companies that handle bitcoin and other digital coins because of concerns they are used by criminals to launder money and that regulators will soon crack down on them.

San Francisco-based exchange, Coinbase, said its UK subsidiary was the first to be granted an e-money license by the UK’s financial watchdog, a precursor to getting the banking relationship with Barclays.

The Barclays account will make it easier for British customers. Previously, they had to transfer pounds into euros and go through an Estonian bank.

“Having domestic GBP payments with Barclays reduces the cost, improves the customer experience…and makes the transaction faster,” said Zeeshan Feroz, Coinbase’s UK CEO.

The UK is the largest market for Coinbase in Europe, and the exchange said its customer base in the region was growing at twice the rate of elsewhere.

A collection of Bitcoin (virtual currency) tokens are displayed in this picture illustration taken December 8, 2017. REUTERS/Benoit Tessier/Illustration

Feroz said that it took considerable time to get a UK bank on board, partly because Barclays needed to be sure that Coinbase had the right systems in place to prevent money laundering.

Regulators across the globe have warned that cryptocurrencies are used by criminals to launder money, and some exchanges have been shut down.

“It’s a completely brand new industry. There’s a lot of understanding and risk management that’s needed,” Feroz said.

Despite growing interest in both digital currencies and the technology behind them, some big lenders have limited their customers ability to buy cryptocurrencies, fearing a plunge in their value will leave customers unable to repay debts.

In February, British banks Lloyds and Virgin Money said they would ban credit card customers from buying cryptocurrencies, following the lead of JP Morgan and Citigroup. [nL8N1PU10Y]

Coinbase said it had also become the first crypto exchange to use Britain’s Faster Payments Scheme, a network used by the traditional financial industry.

Reporting by Tommy Wilkes and Emma Rumney; Editing by Elaine Hardcastle

Hybrid cloud file and object pushes the frontiers of storage

Use of public cloud services have been widely adopted by IT departments around the world. But it has become clear hybrid solutions that span on- and off-premises deployment are often superior, and seem to be on the rise.

However, to get data in and out of the public cloud can be tricky from a performance and consistency point of view. So, could a new wave of distributed file systems and object stores hold the answer?

Hybrid cloud operations require the ability to move data between private and public datacentres. Without data mobility, public and private cloud are nothing more than two separate environments that can’t exploit the benefits of data and application portability.

Looking at the storage that underpins public and private cloud, there are potentially three options available.

Block storage, traditionally used for high-performance input/output (I/O), doesn’t offer practical mobility features. The technology is great on-premise, or across locations operated by the same organisation.

That’s because block access storage depends on the use of a file system above the block level to organise data and provide functionality. For example, snapshots and replication depend on the maintenance of strict consistency between data instances.

Meanwhile, object storage provides high scalability and ubiquitous access, but can lag in terms of data integrity and performance capabilities required by modern applications.

Last writer wins

There’s also no concept of object locking – it’s simply a case of last writer wins. This is great for relatively static content, but not practical for database applications or analytics that need to do partial content reads and updates.

But, object storage is a method of choice for some hybrid cloud storage distributed environments. It can work to provide a single object/file environment across locations with S3 almost a de facto standard for access between sites.

File storage sits between the two extremes. It offers high scalability, data integrity and security and file systems have locking that protect against concurrent updates either locally or globally, depending on how lock management is implemented. Often, file system data security permissions integrate with existing credentials management systems like Active Directory.

File systems, like object storage, implement a single global name space that abstracts from the underlying hardware and provide consistency in accessing content, wherever it is located. Some object storage-based systems also provide file access via network file system (NFS) and server message block protocol (SMB).

In some ways what we’re looking at here are a development of the parallel file system, or its key functionality, for hybrid cloud operations.

Distributed and parallel file systems have been on the market for years. Dell EMC is a market leader with its Isilon hardware platform. Also, DDN offers a hardware solution called Gridscaler and there are also a range of other software solutions like Lustre, Ceph and IBM’s Spectrum Scale (GPFS).

But these are not built for hybrid cloud operations. So, what do new solutions offer over the traditional suppliers?

Distributed file systems 2.0

The new wave of distributed file systems and object stores are built to operate in hybrid cloud environments. In other words, they are designed to work across private and public environments.

Key to this is support for public cloud and the capability to deploy a scale-out file/object cluster in the public cloud and span on/off-premise operations with a hybrid solution.

Native support for public cloud means much more than simply running a software instance in a cloud VM. Solutions need to be deployable with automation, understand the performance characteristics of storage in cloud instances and be lightweight and efficient to reduce costs as much as possible.

New distributed file systems in particular are designed to cover applications that require very low latency to operate efficiently. These include traditional databases, high-performance analytics, financial trading and general high-performance computing applications, such as life sciences and media/entertainment.

By providing data mobility, these new distributed file systems allow end users and IT organisations to take advantage of cheap compute in public cloud, while maintaining data consistency across geographic boundaries.

Supplier roundup

WekaIO was founded in 2013 and has spent almost five years developing a scale-out parallel file system solution called Matrix. Matrix is a POSIX-compliant file system that was specifically designed for NVMe storage.

As a scale-out storage offering, Matrix runs across a cluster of commodity storage servers or can be deployed in the public cloud and run on standard compute instances using local SSD block storage. It also claims hybrid operations are possible, with the ability to tier to public cloud services. WekaIO publishes latency figures as low as 200µs and I/O throughput of 20,000 to 50,000 IOPS per CPU core.

Elastifile was founded in 2014 and has a team with a range of successful storage product developments behind it, including XtremIO and XIV. The Elastifile Cloud File System (ECFS) is a software solution built to scale across thousands of compute nodes, offering file, block and object storage.

ECFS is designed to support heterogeneous environments, including public and private cloud environments under a single global name space. Today, this is achieved using a feature called CloudConnect, which bridges the gap between on-premise and cloud deployments.

Qumulo was founded in 2012 by a team that previously worked on developing the Isilon scale-out NAS platform. The Qumulo File Fabric (QF2) is a scale-out software solution that can be deployed on commodity hardware or in the public cloud.

Cross-platform capabilities are provided through the ability to replicate file shares between physical locations using a feature called Continuous Replication. Although primarily a software solution, QF2 is available as an appliance with a throughput of 4GBps per node (minimum four nodes), although no latency figures are quoted.

Object storage maker Cloudian announced an upgrade in January 2018 to its Hyperstore product which brings true hybrid cloud operations across Microsoft, Amazon and Google cloud environments with data portability between them. Cloudian is based on the Apache Cassandra open source distributed database.

It can come as storage software that customers deploy on commodity hardware, in cloud software format or in hardware appliance form. Hyperfile file access – which is Posix/Windows compliant – can also be deployed on-premise and in the cloud to provide file access.

Multi-cloud data controller

Another object storage specialist, Scality, will release a commercially supported version of its “multi-cloud data controller” Zenko at the end of March. The product promises to allow customers hybrid cloud functionality; to move, replicate, tier, migrate and search data across on-premise, private cloud locations and public cloud, although it’s not that clear how seamless those operations will be.

Zenko is based on Scality’s 2016 launch of its S3 server, which provided S3 access to Scality Ring object storage. The key concept behind Zenko is to allow customers to mix and match Scality on-site storage with storage from different cloud providers, initially Amazon Web Services, Google Cloud Platform and Microsoft Azure.

Microsoft women filed 238 discrimination and harassment complaints

SAN FRANCISCO (Reuters) – Women at Microsoft Corp working in U.S.-based technical jobs filed 238 internal complaints about gender discrimination or sexual harassment between 2010 and 2016, according to court filings made public on Monday.

FILE PHOTO: The Microsoft logo is shown on the Microsoft Theatre in Los Angeles, California, U.S., June 13, 2017. REUTERS/Mike Blake/File Photo – RC177D20CF10

The figure was cited by plaintiffs suing Microsoft for systematically denying pay raises or promotions to women at the world’s largest software company. Microsoft denies it had any such policy.

The lawsuit, filed in Seattle federal court in 2015, is attracting wider attention after a series of powerful men have left or been fired from their jobs in entertainment, the media and politics for sexual misconduct.

Plaintiffs’ attorneys are pushing to proceed as a class action lawsuit, which could cover more than 8,000 women.

More details about Microsoft’s human resources practices were made public on Monday in legal filings submitted as part of that process.

The two sides are exchanging documents ahead of trial, which has not been scheduled.

Out of 118 gender discrimination complaints filed by women at Microsoft, only one was deemed“founded” by the company, according to the unsealed court filings.

Attorneys for the women described the number of complaints as“shocking” in the court filings, and said the response by Microsoft’s investigations team was“lackluster.”

Companies generally keep information about internal discrimination complaints private, making it unclear how the number of complaints at Microsoft compares to those at its competitors.

In a statement on Tuesday, Microsoft said it had a robust system to investigate concerns raised by its employees, and that it wanted them to speak up.

Microsoft budgets more than $55 million a year to promote diversity and inclusion, it said in court filings. The company had about 74,000 U.S. employees at the end of 2017.

Microsoft said the plaintiffs cannot cite one example of a pay or promotion problem in which Microsoft’s investigations team should have found a violation of company policy but did not.

U.S. District Judge James Robart has not yet ruled on the plaintiffs’ request for class action status.

A Reuters review of federal lawsuits filed between 2006 and 2016 revealed hundreds containing sexual harassment allegations where companies used common civil litigation tactics to keep potentially damning information under wraps.

Microsoft had argued that the number of womens’ human resources complaints should be secret because publicizing the outcomes could deter employees from reporting future abuses.

A court-appointed official found that scenario“far too remote a competitive or business harm” to justify keeping the information sealed.

Reporting by Dan Levine; Additional reporting by Salvador Rodriguez; Editing by Bill Rigby, Edwina Gibbs and Bernadette Baum

AT&T & Time Warner: Prepare For The Worst

When news broke that AT&T (T) was purchasing Time Warner (TWX) in a cash and stock deal valued at $107.50 for Time Warner holders I felt very confident that the move would improve AT&T’s profitability and widen its moat. AT&T was (and remains) one of my largest positions, so the news was welcome as I previewed the prospective ecosystem where premium original content and provider flowed seamlessly together permitting AT&T to leverage both as a compelling consumer package.

AT&T has a lucrative history marketing ‘bundle deals’ via DirecTV/U-verse, phone and internet. Adding Time Warner’s content to the mix was like adding another weapon to their arsenal. The move would fortify their position in an era where content is king and the average American residence has nearly 3 TVs per household.

With more and more customers embracing OTT services like Netflix (NFLX) and ditching cable, AT&T recognized the writing on the wall and (potentially) acquired Time Warner to help mitigate the impact and diversify them away from their reliance on legacy telecom services.

Perhaps it was not only adding a weapon to their arsenal but adding a shield to insulate them from the evolving landscape. I credit the management team led by CEO Randall Stephenson for their proactive approach getting ahead of the curve.

Obviously Time Warner’s stock popped immediately on the news while AT&T’s gyrated as investors digested the antitrust risks and whether or not AT&T overpaid.

Let’s take a look at those risks now.

Did AT&T Overpay?

The buyout offer did not come cheap ($85B) and some analysts groaned that while Time Warner was a nice asset, it came at too high a cost. But obtaining regulatory approval would be no walk in the park and AT&T knew they were in for protracted litigation. Let’s look at the EPS and Revenue numbers for the last two FYs for Time Warner:


You will note that on an EPS basis, Time Warner jumped about 9% year over year from $5.86 to $6.41. Time Warner grew EPS over 20% the year before that. When the $107.5 price tag was initially applied to the prior 4 quarters of earnings in October 2016, the P/E ratio stood at approximately 21.

That did look a bit steep.

However, the deal has not closed and when applying today’s earnings to the buyout price, the P/E ratio dips to 16.7. That looks much healthier. You have to tip your hat to AT&T’s management here since they had the prescience to realize that while the initial premium to Warner shareholders seemed lofty, it allowed them to garner unanimous approval from both boards by offering a rich enough premium to Warner holders while not seeming reckless to AT&T holders.

Stephenson and company knew earnings would continue to rise for the content king and before (IF) the deal closes, they will look like geniuses as earning would have grown into the multiple applied at the time of the offer.

Regulatory Risk

And that brings us to the elephant in the room: whether AT&T can out-litigate the DOJ in their pending antitrust case. President Trump has been vocal in his opposition to the buyout and may see it as fulfilling a campaign promise to defeat the deal. But Trump will not have the final word, it will be adjudicated in the courtroom not the political arena, however you would be naïve to believe that those worlds don’t intersect despite our system of checks and balances.

In the interim, AT&T has tried to curry favor with the Trump Administration by announcing bonuses to its employees and lauding the President for the tax bill. Nevertheless, the antitrust team is pushing ahead with bluster and bravado to paint the government as underdogs thwarting corporate strong-arming.

In November of last year I penned a post in the immediate aftermath of DOJ filing suit recommending purchasing shares of Time Warner during the turmoil called, “Time Warner: Heads I Win, Tails You Lose”. In just two days TWX share price plummeted from $95 to below $87. I quickly logged into my brokerage account to pick up shares of Time Warner in the $80’s.

In the post I explained why the volatility generated a perfect arbitrage opportunity, in summary:

This remains mostly true today, however Time Warner’s share price has since rebounded near $95 thereby shrinking some of the potential returns if the buyout is approved. While I have contacts within the antitrust division of the DOJ from my Washington days, they are not at liberty to speak about the case and therefore I know only as much as the public announcements trickling out on a daily basis.

And it is my opinion that the deal looks less likely to succeed now than it did 4 months ago when I wrote that post. But that reminds me of a saying by Clive Davis:


Prepare To Take Action:

During the previous dip, I was on vacation with my wife refilling the gas tank when I checked the market news to find out that Time Warner was selling off. We waited at that pit stop probably longer than she preferred so I could buy shares since I knew that the dip was an overreaction and would not last.

This time, I am planning ahead by placing limit buy orders at $85 and below that are good-til-cancelled in the scenario where the DOJ wins and/or impactful news hits the stock causing a knee-jerk reaction. In essence the hypothetical case looks like this:


In the portion of the chart above circled, you will see a red candlestick where news adversely impacted a stock sending it cascading into free-fall. But you will also notice the rapid rebound where the stock recovered quickly above that price.

The window to pounce and take advantage of the dip was small. That is why I am preparing to maximize the opportunity if it presents itself again. I believe that owning Time Warner shares at $85 and below provides a margin of safety if the two parties are forced to go their separate ways.

Time Warner Flying Solo?

Will I be saddled with overvalued shares of Time Warner purchased at $85? I doubt it. Here’s why:

Growth for Time Warner shows no signs of abatement as each operating division increased revenue and profits in the latest quarter (yet again). HBO’s subscription revenues increased 11% and its unparalleled show Game of Thrones is not due back until 2019. I expect an even larger increase in the months building up to the premiere.

Additionally, on the heels (pun intended) of Wonder Woman’s success, and in the backdrop of the #metoo movement, I believe Warner Bros. has incentive to continue to produce content with powerful heroines. HBO produced an amazing women focused hit with Big Little Lies and it’s due back for a second season featuring Meryl Streep. HBO made a savvy move by riding the coattails of Reese Witherspoon’s success.

On the cable news front, CNN was rated the #1 network in primetime and total day viewership among young adults and tops in digital news as well (from their 4Q earnings release). Whether you believe the treatment of the Trump Administration is favorable or not, it has been favorable to the bottom line of CNN.

And those are just a few samples of the many reasons why I remain bullish on Time Warner.

No one knows for certain how the trial will shake out, but I am positioning myself for success no matter the outcome.

Disclosure: I am/we are long T, TWX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Are You Thinking Of Buying Berkshire Hathaway? Consider Baby Berkshire Instead

Source: Berkshire’s annual letter

A few days ago, Berkshire Hathaway (NYSE:BRK.A) (BRK.B) released its annual report. Markel Corporation (MKL) has not published it yet, but it released its full year results.

As the readers of Warren Buffet’s letters already know, in 2015, he decided to slightly change the comparison criteria he had been using to evaluate Berkshire’s performance. He had always just compared BH’s book value appreciation against S&P 500 appreciation.

Since 2015, he has been taking into account also Berkshire stock price appreciation. The official reason for the change was that book value could not completely reflect the intrinsic value of the company (arguably, when we also consider good will and intangibles), but the real reason was that, for the first time in history, S&P 500 total return in the previous 5 years had surpassed Berkshire’s book value total return, whereas its stock price delta still performed better.

What is remarkable now is that, in the course of the last 10 years, as reported in its last annual report, even Berkshire stock price total return was beaten by S&P 500, a milestone in the company’s history.


Annual percentage change Berkshire

Annual percentage change S&P 500































Compounded annual gain



Source: Berkshire’s annual letter

The reason is quite clear: Berkshire is too big!

Why Berkshire’s best years are not in sight

That’s right. Berkshire is too big; its huge capitalization of about half trillion dollars makes it what I usually call an index company. Its stocks are good for index ETFs and funds, but not so good for individual investments.

In fact, there is a sort of physical limit to stock growth. If a company is very big, it could be hard to find substantial space for business growth. It could be even harder to do it against the will of the anti-trust entities.

Personally, I rarely own shares of companies exceeding a double digit billion-dollar cap. I would prefer to buy an ETF to avoid risks as well as hours of due diligence, therefore, saving time and energy.

With Berkshire we have an additional problem, which is not solvable, because it is linked to the inner structure of the company.

Berkshire is basically an insurance company that uses its float to invest in the equity market

Since Warren Buffett credo is value investing, he never owns more than a dozen companies for 90% of his publicly quoted companies’ portfolio. Now, this is where it gets tough: let’s say you have a $100B budget and you are committed to using no less than 10% of that budget for each purchase, then your hunting territory will be limited to a tiny fraction of the companies that are listed in the public stock exchanges. If you don’t want to overpay your shares, on average, you will need to only bet on the very fat guys. It could be hard to find value out there.

The same goes with acquisitions. It is increasingly difficult for Berkshire to find private companies to buy. I think that, in the near future, we will witness Berkshire implementing the same suggestion W. Buffett gave individual investors several times: 10% bonds and 90% cheap index ETF.

Ten years from now, Berkshire Hathaway will be a huge holding company, with some insurance companies in its pocket, no more and no less. Its biggest competitive advantage will eventually vanish. Given the lack of investment opportunities, it will most likely even start to pay dividends in order to deploy its enormous cash.

This last option could sound good for some investors, but it is drastically against Buffettology itself.

Now let’s talk about Markel

Although Berkshire is likely to be on the path of giving up its terrific long-term performance in the years to come, there is another company that will continue to grow at the same pace, using the same business model structure as Berkshire’s, but enjoying a relatively low capitalization. I am talking about the so-called baby-Berkshire: Markel Corp.

Markel’s intent is not a secret to anyone and that is to copy the Berkshire Hathaway business model. In other words, using the float of a solid insurance business (which yields an underwriting profit 80% of the time) to acquire private companies or to invest in securities. They even hold their annual meeting at the Omaha Hilton Hotel, just a day or two after Berkshire Hathaway’s annual shareholders meeting in the same town.

The company is co-managed by Tom Gayner: a Buffett fan and smart disciple.

Actually, for being a copycat, Markel performed very well. Here is a direct comparison between the two companies during the course of the last 10 years:

Source: Yahoo Finance

Berkshire vs. Markel

In this table, I put some key figures for the two companies, data in billion dollars, collected as of Dec. 2017:






Equity Securities



Fixed Inc Maturity Securities



Cash and Short Term T-notes



Intangibles and Goodwill



Total Assets



Source: Berkshire Hathaway and Markel official filings, Author’s elaboration

We can note that Markel’s float is about 28% of total assets, compared to 16% for Berkshire. That reveals Markel’s bigger exposure to its insurance business.

I like that, because insurance is the key of the two companies’ business model. They are not simply holding companies, but rather insurance companies that invest their float on equities and acquisitions.

Cash and short-term T-notes, compared with equity securities, are more or less the same for both companies, but fixed maturity securities are much bigger for Markel (170% vs. 13% of equity securities for Berkshire).

This reflects Markel’s more conservative approach and it is also partly due to the recent acquisitions of Alterra and State National, which had numerous bonds and treasuries in their investment baskets.

This over-exposure to bonds could lead to a better performance in the future, as management will eventually shift a bigger part of its portfolio to equity stocks.

Goodwill and intangibles, as percentage of total assets, are much bigger for Berkshire (16% vs. 9.5%). Today, this difference can be explained with Buffett and Munger being in charge, but I cannot guarantee that this would be a realistic scenario when they retire.

The bottom line is that Markel is well-positioned for future growth in all respects. Its business is well balanced and strong. Even during a difficult year, like the last one for insurance companies, due to several dramatic catastrophes, Markel managed to deliver an excellent profit for its shareholders. The net unrealized investment gain of more than $760M together with the income of the fast-growing Markel Ventures operation, which exceeded $100M in 2017, easily offset the net loss brought by the insurance segment.

On the other hand, by comparison, Berkshire appears to be scrambling a little bit after Markel.

Even the P/B value ratio, which is cheaper for Berkshire, does not differ that much, if we consider only the tangible assets. Markel is only 12% more expensive than Berkshire according to this metric.


Berkshire Hathaway has been a legend for all investors. Due to its terrific performance, it earned the well-deserved fame of a modern institution in the financial environment.

Nevertheless, several signs are telling us that its future performance will not be as good as the past ones.

If you are as intrigued as I am by the Berkshire’s business model, you should buy Markel instead, a company that shares the same investment philosophy, but without the size-problems of its larger twin.

After all, a Markel’s buy-out would not be that extravagant for Berkshire in the future. Maybe it is already on Mr. Buffett’s to do list.

Disclosure: I am/we are long MKL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Kinder Morgan Dividend Story Is About To Resume

By the Sure Dividend staff

Kinder Morgan (KMI) has been a favorite dividend growth investment for many retail investors, until the company cut its payout by three quarters two years ago. After two years of low payouts, during which the company focused on reducing debt levels and finishing projects, things are about to change soon. Kinder Morgan is one of 294 dividend stocks in the energy sector. You can see all 294 dividend-paying energy stocks here.

Kinder Morgan has aggressive dividend growth plans for the coming years, but unlike in the past, this time they look very achievable. The company is about to increase its dividend meaningfully soon, and investors will very likely benefit from ongoing strong dividend growth rates over the coming years.

Since Kinder Morgan is not trading at an expensive valuation at all, shares of the pipeline giant are worthy of a closer look right here.

Company Overview

Kinder Morgan is proud of its huge asset base, and rightfully so:

(company presentation)

The company operates a giant pipeline network spanning North America, with the focus being put on natural gas pipelines. Kinder Morgan also owns terminals, pipelines and oil production assets on top of its natural gas pipeline network.

(company presentation)

The vast majority of Kinder Morgan’s revenues are fee-based, which means that there is very low commodity price risk. The company’s revenues, earnings and cash flows do not depend highly on the price of oil and natural gas. The only segment with a bigger exposure to the price of oil is Kinder Morgan’s CO2 business. Kinder Morgan is hedging its revenues from that segment, though, thus the short-term price swings for WTI do not matter very much.

Due to the fact that Kinder Morgan is much less impacted by commodity price swings than other companies in the oil & gas industry, its cash flows are not cyclical at all.

(company presentation)

During 2018 Kinder Morgan plans to increase its EBITDA as well as its distributable cash flows slightly. Distributable cash flows are operating cash flows minus the portion of capex that is needed to keep the assets intact (maintenance capex). Distributable cash flows are thus the portion of the company’s cash flows that are not needed to maintain the business, those can be spend in several ways:

– Growth capex, which expand Kinder Morgan’s asset base and lead to higher earnings / cash flows in the future.

– Shareholder returns via dividends & share repurchases.

– Debt reduction, which leads to lower interest expenses and thereby positively impacts the company’s earnings and cash flows.

A couple of years ago Kinder Morgan has paid out almost all of its DCF in dividends and financed growth capex by issuing new shares and debt. That did not work very well once its share price collapsed, which was the reason for the dividend cut, as Kinder Morgan had to finance its growth projects organically from that point.

Right now Kinder Morgan is using its DCF for a combination of growth capex, dividends and share repurchases. The company has brought down its debt levels meaningfully already, but doesn’t plan to reduce its leverage further this year.

Kinder Morgan Has Announced Aggressive Dividend Growth Plans Through 2020

In the last two years Kinder Morgan has produced about $2.00 per share in distributable cash flows, but paid out only $0.50 each year. This has allowed the company to finance billions in growth projects with excess cash flows whilst also paying down debt.

The company has stated that it wants to increase the dividend meaningfully this year as well as in 2019 and 2020:

– The dividend will be $0.80 for 2018 (which means a 60% raise year over year)

– The dividend will be $1.00 for 2019 (which means a 25% raise yoy)

– The dividend will be $1.25 for 2020 (which means a 25% raise yoy, again)

This looks like a very compelling dividend growth rate, especially when we factor in that Kinder Morgan’s current dividend yield is not low at all: Based on a share price of $16.10, Kinder Morgan’s shares yield about 3.1% right now. The forward dividend yields are thus 5.0%, 6.2% and 7.8% for 2018, 2019 and 2020, respectively.

A closer look at the company’s dividend growth plans and cash flow generation shows that those plans are not unrealistic at all:


DCF per share


Payout ratio

Excess DCF after dividend payments





$2.8 billion





$2.4 billion





$2.0 billion

Assumption: DCF grows by two percent a year

Even in a rather conservative scenario where distributable cash flows grow by only two percent annually, Kinder Morgan’s payout ratio stays below 60% through 2020. At the same time the company would generate $7.2 billion in cash flows that are not needed to pay the dividends. Those cash flows could thus be utilized for growth capex, share repurchases or for paying down debt.

Kinder Morgan Has Significant Growth Potential

The scenario laid out above (2% annual DCF growth) is rather conservative due to the fact that Kinder Morgan plans to invest heavily into new assets over the coming years:

(company presentation)

Management has identified $12 billion of potential investments which fit the company’s strategy and which promise attractive returns. The company could complete a meaningful amount of these projects in the coming years, as high after-dividend cash flows allow the company to spend on growth investments heavily.

According to management these assets could add $1.6 billion to the company’s EBITDA, which means a 21% increase over 2017’s level. When we assume that distributable cash flows would grow by 21% as well, Kinder Morgan’s DCF per share could hit $2.40 in 2022. This calculation does not yet include the positive impact share repurchases would have on the DCF per share growth rate.

Kinder Morgan has recently started a $2 billion share repurchase program and has already bought back more than 27 million shares since December. At that pace Kinder Morgan’s share count would drop by almost five percent a year, this alone would drive DCF per share up by mid-single digits each year, without any underlying organic growth.

Due to its focus on natural gas pipelines Kinder Morgan is well positioned for the future. Natural gas consumption will, according to most analysts, continue to grow for decades, as natural gas combines several positives: The commodity is significantly more environmentally friendly than oil and coal, it is inexpensive and it is available in North America in large quantities. Through LNG terminals natural gas can even be exported to other markets (primarily in Asia).

All the natural gas that gets used in the US or exported to foreign countries needs to be transported through the US by pipelines. Kinder Morgan as the provider of the vastest pipeline network should benefit from that trend, which will lead to ample cash flows for decades.


The US Energy Information Administration expects that global consumption of natural gas will grow from 130 quadrillion Btu to 190 quadrillion Btu through 2040. Since proved reserves of natural gas in the US are growing, it seems opportune to assume that the US will remain a major producer of natural gas going forward. This, in turn, means that Kinder Morgan’s asset base will not only exist for a very long time, but will remain very profitable through the coming decades.

Kinder Morgan Is Trading At A Discount Price

KMI EV to EBITDA (Forward) data by YCharts

Kinder Morgan is trading at the lowest valuation the company’s shares have traded for over the last couple of years right now. With a forward EV to EBITDA multiple of about ten Kinder Morgan is also not looking expensive at all on an absolute basis.

When we focus on the cash flows the company generates, we see that Kinder Morgan trades at eight times trailing DCF and at slightly less than eight times forward distributable cash flows. This means that shares can be bought with a distributable cash flow yield of 12.7% right now. Kinder Morgan is a non-cyclical company which has a solid growth outlook, and at the same time its size and diversified asset base mean that there isn’t a lot of risk. Based on those facts the current valuation looks pretty low.

Investors can currently acquire shares of the company with a forward dividend yield of 5.0% (the dividend increase announcement should come next month) at a DCF multiple of slightly below 8. For long term focused investors who seek an investment that provides a growing income stream that looks like an attractive investment case.

Final Thoughts

Kinder Morgan’s failed dividend growth plans hurt many retail investors in the past, but management has learned from its mistakes. This time the dividend growth plans are well thought out and look very achievable.

Thanks to high cash flows and a big growth project backlog Kinder Morgan should be able to provide a steadily growing income stream over the coming years. This, combined with a low valuation, makes shares of the pipeline giant worthy of a closer look right here.

Disclosure: I am/we are long KMI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Real Estate + Real Assets = Real Opportunity To Earn Up To 40% Per Year

Recently, I read an interesting infrastructure article by fellow Forbes contributor, Joel Moser, in which he wrote:

An infrastructure investor is primarily focused upon preserving value and providing moderate returns. As markets continue to converge to the point that most everything else is becoming correlated, the emergence of a range of infrastructure investment vehicles for investors both large and small is a welcome trend from a financial services industry still seeking redemption from its role in the global financial crisis.

Moser did an excellent job explaining the differences between real estate and infrastructure:

Like its investment asset class close relative real estate, infrastructure is a “real asset.” Indeed, infrastructure usually exists in the physical world as real estate – a physical asset permanently attached to the ground. But the similarity mostly ends there.

He adds:

While real estate ownership can be forever, its current value at any given time is often linked to larger economic forces: correlated to the economy, so that a buyer’s interest is related to economic outlook, will things get better or worse, widely or at least for this particular piece of earth.

By contrast, infrastructure’s value is less correlated, that is to say its value may neither strongly increase nor decrease based upon larger economic trends.

As a REIT analyst these two worlds – real estate and infrastructure – have merged paths as allocations to listed infrastructure have been on the rise in recent years amid growing demand for real assets offering relatively predictable cash flows and the potential for attractive real returns.

As cash-strapped governments increasingly turn to private markets to fill a capital void, new security structures have been introduced globally, including those focused on income delivery.

Although rarely applied until recently, a REIT is a perfect vehicle that can be used to raise capital for infrastructure investments in “public-private partnership” transactions. In the abstract, REITs have certain advantages over the fund model as several favorable IRS private letter rulings sanctioning the use of REITs to own electric and gas distribution systems have increased interest in their role in infrastructure investments.

The Trump administration has shown a strong preference for funding investments from the private sector to pay for infrastructure priorities. The idea is to offer financial incentives to private companies that want to back transportation projects.

Under that model, known as a public-private partnership, firms bid on a project, build and maintain it for a set amount of time and recover costs through tolls or set state payments. Trump has argued that it’s cheaper and quicker when private investors are in charge, as opposed to the federal government.

Infrastructure REITs are Equity REITs that own and manage infrastructure properties and collect rent from tenants and they include American Tower (AMT), Crown Castle (CCI), CorEnergy (CORR), Hannon Armstrong (HASI), Power REIT (PW), InfraREIT (HIFR), SBA Communications (SBAC), and Uniti Group (UNIT). In addition, Landmark Infrastructure (LMRK) is a RECO (real estate operating company) that recently changed its legal structure moving the Partnership’s assets under a subsidiary that is now taxed as a REIT.

The company decided to make this change based on feedback from investors to broaden the investor base by substantially eliminating unrelated business taxable income, otherwise known as UBTI. It also significantly simplifies state income tax filings for LMRK unit holders. With this change, LMRK did not eliminate the Partnership structure since that will continue to give the company operating flexibility.


The Overview of Assets

LMRK’s real property interests underlie its tenants’ operationally essential infrastructure assets in the wireless communication, outdoor advertising, and renewable power generation industries. Effectively all of the company’s leases are triple, and its organic growth is through contractual rent escalators, lease modifications, and renewals (99%+ property operating margins, no maintenance capex).

A close up of a map Description generated with high confidence

LMRK sees many opportunities internationally as well as with operating partners that have a unique expertise and experience in industry relationships that complement the company’s efforts at the Partnership and the sponsor.

Within the wireless sector, LMRK’s Partnership sponsor and Ericsson recently announced the selection of Ericsson to deploy the Zero Site microgrid solution across North America.

The self-contained, neutral-host smart pole is designed for carrier and other wireless operator colocation, and the Zero Site is designed for macro, mini macro, and small cell deployments and will support IoT, carrier densification needs, private LTE networks, and other wireless solutions.

Ericsson microgrid includes battery storage applications and grid-control software. The Partnership will selectively deploy the Zero Site solution on its existing real estate interests, along with new acquisition opportunities.

A picture containing text, map Description generated with very high confidence

LMRK’s asset portfolio represents less than 1% of the total U.S. market. The market is highly fragmented, as most individual property owners in this industry have only 1 or 2 locations (the No. 1 cellular tower company and the No. 1 billboard company own 10% or less of the land under their assets).

A screenshot of a cell phone Description generated with very high confidence

This is a growth-oriented MLP formed by Landmark Dividend LLC (the “Sponsor”) to acquire, own, and manage a diversified, growing portfolio of real property interests. As you can see below, American Tower, Crown Castle International, and Outfront Media (NYSE:OUT) – all REITs – are tenants of LMRK:

A screenshot of a cell phone Description generated with very high confidence

The company’s diversified platform provides stable and predictable distributions. Many of the locations/sites are difficult to replicate since they are located in major population centers (87% of revenues from Tier 1 tenants for their essential operations). The portfolio consists of 2,368 Assets diversified across 50 states, Washington, D.C., and various international locations.

A picture containing text, map Description generated with very high confidence

No Cap Ex + High Dividend = Happy Investor?

The true value proposition for LMRK is that the company has no property tax or insurance obligations and no maintenance capital expenditures. The portfolio is 96% occupied (99% historical lease renewal rate) and has no commodity exposure. The company’s average lease term is 25 years:

A picture containing screenshot, businesscard, text Description generated with high confidence

LMRK’s underlying properties are operationally critical assets:

  • Wireless – Highly interconnected networks; growing capacity/coverage
  • Billboards – Key traffic locations, favorable zoning restrictions with “grandfather clauses”
  • Renewables – Solar/wind corridors, proximity to transmission interconnects

A screenshot of a cell phone Description generated with very high confidence

A screenshot of a cell phone Description generated with high confidence

A close up of a device Description generated with high confidence

A screenshot of a cell phone Description generated with very high confidence

The properties are difficult to replicate, with significant zoning, permitting, and regulatory hurdles in finding suitable new locations, including the time and cost of construction at a new site. Vacating tenants must often return the property to its original condition.

As viewed below, LMRK’s platform is highly desired by many Tier 1 tenants (many are large, publicly traded companies). No single tenant accounts for more than 15% of revenue:

A screenshot of a cell phone Description generated with high confidence

Consider These Risks…

LMRK’s general partner and affiliates have conflicts of interest – LMRK and affiliates own a 24.4% limited partner interest in the company and control the general partner.

Also, unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting the business, and therefore, limited ability to influence management’s decisions regarding the business. For example, unlike holders of stock in a public corporation, unitholders do not have “say-on-pay” advisory voting rights.

Unitholders did not elect the general partner or the board of directors of LMRK’s general partner and will have no right to elect the general partner or the board of directors of the company’s general partner on an annual or other continuing basis.

According to company CFO George Doyle, there “is some added flexibility by being an MLP. The REITs can generally only own 20% of their assets in a taxable REIT subsidiary. That’s one of the things that we have flexibility over, because we can create essentially a TRS directly under the MLP. We’re not subject to that 20% limitation, and then there are a few other advantages as well. So we think that for now, it’s a great structure. And we may never need that added flexibility, but we have it, and it was easier to basically create the REIT underneath the MLP at this point in time than it was to contemplate full REIT conversion.”

LMRK believes that its “aligned sponsorship model” will drive growth. Given its substantial cash investment and significant ownership position in LMRK, the company expects that its strategic sponsor will promote and support the success of the business (the sponsor contributed ~$60 million at the IPO, invested ~$39 million in cash and ~$21 million in rollover equity, and the sponsor owns LMRK’s General Partner all of the IDRs and a 15% LP interest).

A close up of a map Description generated with high confidence

As noted above, LMRK plans to form the REIT subsidiary for the primary purpose of eliminating unrelated business taxable income, otherwise known as UBTI. It also significantly simplifies state income tax filings for the unitholders. Keep in mind, this structure also creates complexity, especially as it relates to the management structure.

I would much prefer to see LMRK convert to a REIT or spin-off individual REITs specialized in their respective businesses. I certainly see the value of the Net Lease model in which the company can structure sale/leasebacks to create investment spreads, but the most successful Net Lease REITs will always rise to the top when they achieve the lowest cost of capital.

This Is What Gets My Shelf Space

LMRK has one of the highest dividend yields in the peer group:

A screenshot of a cell phone Description generated with very high confidence

LMRK recently announced the distribution of $0.3675 per common unit for Q4-17 (or $1.47 per common unit on an annualized basis), marking the 12th consecutive quarter that the partnership has increased its cash distribution since the IPO. This quarter’s distribution represents 5% increase year-over-year.

LMRK’s coverage ratio, which is defined as distributable cash flow divided by distributions declared on the weighted average common and subordinated units outstanding during the quarter, was 0.86 times in the fourth quarter. The coverage ratio was impacted by several factors, including the timing of capital raises and deployment of capital.

LMRK expects acquisition volume and development spending in the range of $250 million to 300 million in 2018; the company anticipates new development spending at approximately $50 million for 2018 as it continues to make progress on the growing initiatives in the pipeline.

As part of guidance, the Partnership sponsor intends to offer LMRK the right to purchase between $200 million and $250 million of assets in 2018. These acquisitions and developments, combined with organic portfolio growth, are expected to drive distribution growth of 10% over the fourth quarter of 2017 distribution of $0.3675 per common unit by the fourth quarter of 2018.

The recent tax reform changes are favorable to LMRK as the new law provides 20% deduction for dividend income and MLP Partnership income.

A screenshot of a cell phone Description generated with very high confidence

The Bottom Line

As I said above, a REIT is a perfect vehicle that can be used to raise capital for infrastructure investments in public-private partnership transactions and although Landmark is not a REIT (at the parent level), the modified reorganization of the legal structure now allows unit holders to freely purchase units without having to worry about generating taxable income sourced to states outside their own state of residency.

Before my recommendation, consider a few key risks: (1) LMRK is a small cap ($410 million) that means the shares are subject to outsized volatility, (2) LMRK has higher leverage than most REITs (65% debt to market cap), and (3) LMRK is externally-managed. Collectively, I consider Landmark speculative and my BUY recommendation is rooted in the higher-risk framework.

However, I find Landmark a very compelling infrastructure idea that could return outsized returns, over 40% annually. With just a handful of analysts covering Landmark, this pick could be one of the best kept secrets around – that is, before you read this article.

A screenshot of a cell phone Description generated with very high confidence

Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors if they are overlooked.

Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).

Sources for images: F.A.S.T. Graphs and LMRK Investor Presentation, unless otherwise noted.


I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

U.S. appeals court in San Francisco will hear net neutrality appeal

WASHINGTON (Reuters) – A federal judicial panel said on Thursday that challenges to the Federal Communications Commission’s repeal of the Obama era open internet rules will be heard by an appeals court based in San Francisco.

FILE PHOTO – Supporter of Net Neutrality Lance Brown Eyes protests the FCC’s recent decision to repeal the program in Los Angeles, California, November 28, 2017. REUTERS/ Kyle Grillot

The U.S. Judicial Panel on Multidistrict litigation said it randomly selected the U.S. Ninth Circuit Court Nth circuit to hear the consolidated challenges. The FCC declined to comment on the decision.

A dozen challenges have been filed by 22 state attorneys general, public interest groups, internet companies, a California county and the state’s Public Utilities Commission seeking to block the Trump administration’s repeal of landmark rules designed to ensure a free and open internet from taking effect.

The suits were filed in both the Ninth Circuit and District of Columbia appeals court. Of the Ninth Circuit court’s 24 active judges, 18 were appointed by Democratic presidents and six by Republican President George W. Bush. There are six current vacancies and President Donald Trump has nominated two candidates.

The FCC published its order overturning the net neutrality rules in the Federal Register on Feb. 22, a procedural step that allowed for the filing of legal challenges.

The Republican-led FCC in December voted 3-2 to overturn 2015 rules barring service providers from blocking, slowing access to or charging more for certain content on the internet.

FILE PHOTO – Chairman Ajit Pai speaks ahead of the vote on the repeal of so called net neutrality rules at the Federal Communications Commission in Washington, U.S., December 14, 2017. REUTERS/Aaron P. Bernstein

Trump in January criticized opponents for filing cases in the Ninth Circuit and asserted in a tweet they “almost always” win before being reversed.

New York, California, Illinois, Massachusetts, New Jersey and Pennsylvania are among the states challenging the decision, arguing the FCC cannot make “arbitrary and capricious” changes to existing policies and that it misinterpreted and disregarded “critical record evidence on industry practices and harm to consumers and businesses.”

FCC Chairman Ajit Pai has said he is confident the order will be upheld.

The White House Office of Management and Budget still must sign off on some aspects of the FCC reversal before it takes legal effect. That could take months.

The repeal of the net neutrality rules was a victory for internet service providers like AT&T Inc, Comcast Corp and Verizon Communications Inc, conferring power over what content consumers can access.

On the other side, technology companies including Alphabet Inc and Facebook Inc have thrown their weight behind a congressional bid to reverse the net neutrality repeal.

Reporting by David Shepardson; Editing by Cynthia Osterman

Amazon’s Echo Speakers Are Spontaneously Laughing—And Users Are Spooked

Amazon is trying to stop its Amazon Echos, powered by the Alexa voice-activated assistant, from suddenly laughing.

The online retail giant told to tech news publication The Verge on Wednesday that it is aware that some Echo Internet-connected speakers have a laughing problem and is “working to fix it.”

Amazon’s (amzn) acknowledgement of the issue comes after several people have reported on Twitter and Reddit that their Amazon Echo speakers have started laughing, for no apparent reason. People typically activate their Echo speakers by saying the word “Alexa,” which triggers the device to listen and respond to commands like changing the volume.

The latest laughing is causing some customers to feel unsettled and confused. Other say it’s spooky, like something out of a horror film.

Although third-party devices like some HP Inc. personal computers and certain modems work with Alexa, the problem appears to be limited to the Amazon Echo and the smaller Echo Dot.

A Reddit user also described problems with the Amazon Echo Dot two weeks ago:

We just added the echo dots two months ago. The dot we have in the master bath has twice now randomly played a track of a woman laughing at about 10 p.m. the first time I thought the fire tv was sending audio through it since I had been trying to sync them up to the tv, but tonight was completely random. No indication on the app that the device heard any command. We had the dot laugh several times and it wasn’t the laugh Alexa produces, but definitely sounded like a canned laugh, not like someone laughing live.

It’s unclear what’s causing the errors and Amazon’s brief statement did not say when the problem would be fixed or if other Alexa-enabled devices are also affected.

Get Data Sheet, Fortune’s technology newsletter.

Fortune contacted Amazon for more details and will update this story if it responds.