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KKR: Greed May Be Good – But Too Much Risk? Never

Whenever I think of the movie Wall Street, I’m transported back to the 1980s era of financial excess…

The movie came out in 1987 and, like many others, I became a stockbroker partially inspired by the exciting (if morally questionable) business portrayed in the film.

Reportedly, various figures went into making the character of Gordon Gekko. But when I think of him, what comes to mind is the granddaddy of leveraged buyout firms: Kohlberg Kravis Roberts & Co.

Most notably, one of the firm’s original partners, Henry Kravis…

Leveraged Buyout King

Kohlberg departed the firm in the late ‘80s. Later, the company took a portion of the firm public, which is now known simply as KKR & Co. L.P. (KKR).

But before that transformation, KKR was a pioneer of the modern-day leveraged buyout firm, which is the primary reason I think of it when I watch Wall Street.

Gordon Gekko famously bought out Bluestar Airlines in order to break it up and sell its parts off for profit.

The real KKR, led by Henry Kravis, gained worldwide fame in 1988 for the leveraged buyout of RJR Nabisco.

It was the biggest buyout ever up to that point.

Needless to say, the firm was turning a tidy profit in its heyday. For the most part, it’s continued to do so up through today.

But the story for the shareholders of the publicly traded KKR is a little different than it is for the partners of the firm.

And since (potentially) that’s us, what I’m interested in are the dividend and prospects for capital appreciation…

Perspective is Everything

The dividend is on the high end, amounting to an annualized yield of 7.91%.

Nevertheless, the company is short on history, with dividends payments stretching back to just 2010.

Further, the stock’s performance ranges from terrible to outstanding – depending upon when you bought it, that is.

Had you purchased the stock on the day it IPO’d, you’d have suffered through tremendous volatility and, absent the dividend, you’d still be at a loss.

The stock opened at $23.25 back in 2007, and trades for less than $21 today.

What’s worse is, in 2009, the stock dropped to $1.90 per share, a loss of almost 92% of its value from the price it opened at in 2007.

On the other hand, had you bought it near its lows of 2009, today you’d be celebrating nearly an 11-fold return.

Which brings us to the big question: Can it go higher – and continue to pay the dividend – moving forward?

Well, KKR has been posting a mix of impressive and concerning numbers.

Assets under management totaled $83.5 billion as of June 30, 2013, up from $78.3 billion as of March 31, 2013.

Fee-related earnings were $98.2 million for the second quarter and $186.2 million for the first half. That’s up from $69.8 million and $143.1 million in the same periods of 2012, respectively.

On the downside, net income for the second quarter was $15.1 million, and for the first half of 2013 it was $208.6 million. That represents a drop from $146.3 million and $336.7 million in the same periods of 2012, respectively.

Altogether, we’re looking at a decline in net income of more than 89% for the second quarter.

In my book, that’s more than enough trouble for me to walk away.

Bottom line: When a company displays such variability in its net income and stock price, an 8% dividend is nothing more than a yield trap.

Safe investing,

Steve Gunn

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