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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Kinder Morgan

June 12th 2015

Kinder Morgan
NYSE Symbol: KMI
Industry: oil pipelines
Price as of 6/12: $38.92


The major averages finished higher for the first time in 4 weeks, but will only a modest rebound the broader market feels like it has more downside than upside in the coming weeks. The Dow Jones Transportation Average remains in last place among the major averages down 8% year to date. Many transportation stocks look appealing at these levels including the airline stocks. The rest of the sectors and averages look like they have more downside which should give most investors pause. June is traditionally a weak month while August and September are ranked as the two worst months for the major averages making this time of the year a good time to exchange or rotate into defensive high dividend yielding stocks. This week we'll highlight one of the best dividend stocks in the beaten down energy sector. The stock of the week is Kinder Morgan. Kinder Morgan is the largest energy infrastructure company in North America. It owns an interest in or operates approximately 80,000 miles of pipelines and 180 terminals pumping natural gas, refined petroleum products, crude oil, carbon dioxide (CO2) and more. In most of its businesses KMI operates like a giant toll road receiving fees for services. Kinder Morgan avoids commodity price risk with approximately 85 percent of cash flow being fee-based and another 14 percent that's hedged for 2015. This consistent cash flow has given management at Kinder Morgan confidence to raise their dividend 5 times in the last year boosting the yield up to 4.9%. Kinder Morgan is not without some risks including a high debt load, but with the broader market starting show signs of more volatility, investors may start to rotate into high dividend paying stocks like Kinder Morgan.  

The highly regulated pipeline industry gives Kinder Morgan monopoly-like characteristics with a nearly a third of the country's gas volumes flowing through its pipelines. Most of Kinder Morgan's customers typically sign up for long-term contracts, locking in Kinder Morgan's cash flow for years. Last quarter, the company reported their five business segments produced $1.912 billion in segment earnings before DD&A and certain items. The company earned distributable cash flow before certain items of $0.58 per share for the first quarter, which equates to coverage in excess of our dividends of $206 million. The company has ambitious plans to increase their dividend 10% annually over the next decade. To do this Kinder Morgan will continue expansion plans. Kinder Morgan had $17.6 billion in expansion and joint venture investments in its backlog. They acquired Hiland Partners for approximately $3 billion, gaining a foothold in the Bakken basin in North Dakota, one of the most fertile producing areas in the U.S., with well-established, mostly fee-based midstream assets. On top of that, Kinder Morgan has announced that it will purchase three terminals and one undeveloped site from Royal Vopak for approximately $158 million. All the acquisition and money spent has built Kinder Morgan's debt level giving some investors pause. Currently Kinder Morgan garners an investment grade level on their debt. However a downgrade to junk status would cost the company severely, with higher debt payments and a need for more outstanding shares thereby diluting current shareholders.

But at present, everything management is saying and doing is working. The company has raised the dividend 5 times in the last year. The founder, Richard Kinder has spent $4 million in March and another $4 million last week buying his stock at the $39 to $40 price level. Billionaire, Leon Cooperman is counted as a shareholder. Three separate analysts have price targets of $50 or the upper $40s implying 25% to 20% upside not including the dividend. If Kinder Morgan can continue to manage their debt, the company will continue to reward shareholders with great dividend income and capital appreciation as well.