Stock of the Week
Kinder Morgan (KMI)
NYSE Symbol: KMI
Price as of 8/24: $35.29
The major averages continue to shine rallying six straight weeks retesting the April highs. The recent rally was snapped this week with September, one of the weakest months of the year, lurking out there. The dividend stocks have been on fire as investors search out yield. A couple weeks ago, we featured a Master Limited Partner (MLP) company, Kinder Morgan Energy Partners. This past week, Barron's highlighted the MLP sector recommending Kinder Morgan Energy Partner's parent company. The featured stock of the weak is this parent company by the same name, Kinder Morgan. Kinder Morgan is one of the largest U.S. oil and gas pipeline providers with 37,000 miles of oil, gas, and carbon dioxide pipelines. MLPs have become popular in this low interest rate environment due to their high income yields and favorable tax treatment. The dividend payments which really aren't dividend payments, but a return on capital are virtually tax free, but lower the cost basis expanding any future capital gain tax. Investors looking for diversification outside the traditional bond and stock categories should take a look at the MLP sector and Kinder Morgan.
As mentioned, Kinder Morgan is a midstream company with 37,000 miles of pipelines collecting tolls or fees along the way. Kinder Morgan generates 95% of its revenue from fees like a toll collector. The added bonus of owning Kinder Morgan is the added distributions from their subsidiary, Kinder Morgan Energy Partner. For example when Kinder Morgan Energy Partner raises its' distribution, the parent company gets a higher percent of that income much like a general partner in a hedge fund or a real estate partnership. Going forward, Kinder Morgan should be able to expand its' distributions thanks to the acquisition of rival, El Paso. Barclays views the $38 billion El Paso acquisition as a transformative transaction for Kinder Morgan. It expands Kinder Morgan's footprint into key gas end markets, enhances an already high degree of cash-flow stability and increases dividend growth outlook. The transaction also benefits Kinder Morgan Energy Partners. With the recent acquisition, the Barrons article predicts Kinder Morgan could possibly double its' distributions to shareholders in the next five years. Currently the distribution is $1.40 for a yield of 3.90%. If the distribution goes from $1.40 to say $2.50 with a 4% yield the stock should appreciate to $62 a share. If the distribution does double, then the stock will rise to $70 for a double in the stock price not including the 4% dividend.
Kinder Morgan and the MLP sector are a great place to diversify a portfolio to get high income, tax benefits, and better than average capital appreciation without the volatility that traditional bonds and stocks provide.