Kinder Morgan: A Kinder, Gentler Investment Opportunity 14 comments
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Before we get into the meat of it and introduce you to a very compelling income opportunity, a few brief words on the overall market situation as it appears today. It will be important to bear these items in mind as the calamitous cacophony of media Chicken Littles sings its “sky is falling” reprise.
Take it to heart that:
Stock prices turn before the economy does. The last time a consumer-induced recession hit in 1990, the S&P 500 had rallied more than 25% from its lows in October of that year before the economy began to turn in March of 1991. So, too, back in 1982, when the market rose a killer 35% before the recession ended in November of the same year. The next bull market in stocks is taking shape now and may be upon us in just a couple of months, if not sooner. There should be lots of jigs and jags (and plenty of “THE SKY IS FALLINGs”) between now and then.
- Every major economy on earth is now actively engaged in auto-stimulation. Get your head out of the gutter, man; we’re referring to economic stimulus. And it appears to be gaining some traction – not to mention confidence. Interest rates are falling, works projects are being budgeted and capital injections aplenty are mainlining their way into the arms of junkie financial firms the world over. It will take a while before the funds actually accomplish much, but confidence – confidence is everything.
Mutual and hedge fund redemptions played no small role in the sell off of September/October last year, and thankfully that selling is all but over. We wrote extensively about it at the time. Cash positions are now as large as they’ve ever been and all that’s required is someone brave enough to fire the starter’s gun.
- Stock valuations are perfectly sane (for this particular point in this insane world’s time). We are in a recession – a heavy-duty one, to be sure. But stocks are priced for a depression, and there are plenty of good names with cash rich balance sheets and safe dividends in good shape to weather the downturn. Be on the lookout for them.
- As for dividends (which is why we’re here), you’d be smarter to buy them than a T-Bill or CD. And you’ll do better with the taxman for it, too.
That’s it. Call me Pollyanna if you like, but just be sure to leave me your phone number so I can ring you up in six months and call you an ARSE for not having jumped in now when the going was still good!
Now on to something a lot kinder
The best investments are the ones that pay and pay and keep on paying. This week’s spotlight investment is a company that fits that bill to a tee. Let’s begin with a look at the chart.
click to enlarge
Kinder Morgan Energy Partners (KMP) is one of America’s biggest pipeline companies. With a market cap of $20 billion, Kinder Morgan boasts 25,000 miles of pipe and 170 storage terminals across the continent. And a look at the chart shows that this is one company that suffered very little in the “worst bear market since the great depression.”
KMP is now selling for less than 10% below its price peak before the heavy selling began in August of last year. It’s trading above its 50 day moving average, and though we’d like to see a lot more positive volume underpinning the rise, we’ll take it anyway. Why? Because the company pays a quarterly dividend of $1.05 per share for an annual yield of 8.25%. Moreover, Kinder Morgan has just raised the dividend (from $1.02 per share), which says a lot in this economic environment. And on top of that, this is its seventh consecutive quarterly raise in the dividend! Get down on both knees and say “Thank You Kindly!”
Ahem. KMP has a stellar record of dividend payment, having hiked the payout annually now for thirteen years running. They also have a perfect record of payment going all the way back to the company’s founding in 1992. Kinder Morgan’s CEO, Richard Kinder (a very kind man), recently referred to his company as: “essentially a huge toll road.” We like it, Ricky. Toll road. Money.
How does the broader energy picture affect Kinder Morgan’s profits?
First, know that the current recession has destroyed energy demand worldwide in a profound way; that’s why crude prices dropped from $150 a barrel to their recent lows in the mid $30’s. And yet the current price situation is not sustainable. Supply factors will force prices higher, despite the drop in demand.
Sure OPEC wants higher prices per barrel, but they have never been able to keep to their sales quotas and, more significantly, they just don’t represent the same force in world energy markets they did back in 1974 at the height of the oil crisis.
More significant is the sheer seizure in development spending that attended the recent drop in crude prices. It simply no longer pays to go hunt for new sources when extraction costs are higher than current spot prices. Deep-water resources in the Gulf of Mexico, for example, and offshore finds in Brazil’s Tupi field require prices of at least $60 a barrel before they become viable. And in the Canadian oilsands it’s even more expensive. There, the cost of finding, developing and producing a new barrel of oil runs roughly $90 – four times more than it was a decade ago. See here:
More sensible to wait for the market to do its work, for existing supply to be purchased and the resulting shortages to force the price of oil futures back into triple digit territory.
Yet even when that transpires, you can count on big oil being slow to revamp budgets and get active. In the current financing environment we don’t imagine anyone will be eager to raise cash for new exploration.
Which means higher oil and gas prices are literally “in the pipeline” for our friends at Kinder Morgan Energy Partners.
The Residual Income Report recommends immediate purchase of KMP at $50.50.
Sweet crude. So kind.
Disclosure: None
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Yes, it does act like a DRIP, which means if you are in the accumulation phase your total number of shares is increasing each year with no effort or cost on your part. If your need money, sell a few shares.
Yes, the dividend is the same. $1.05 now and the share price is less so the yield is higher and no annoying K1 to deal with. Great for a taxable acct., even better in a Roth IRA.
I don't know why the difference in price between KMP and KMR shares. Perhaps a lack of understanding by investors??
Disclosure: long KMR in my Roth
Also, there are better plays in the MLP midstream space IMHO, if upside and dividend size is of interest to the investor.
And not every analyst believes that KMP's dividend will be maintained this year at its current level.
There are also worse stocks to invest in.
Check with your accountants, but my understanding is that LPs and MLP’s should not be held in IRAs because they generate unrelated business taxable income (UBTI) which can't be tax-deferred or sheltered. Even if the UBTI is not a problem for a particular MLP, you'll need to file the paperwork.
My broker (unlike most) also accumulates fractional shares until I have more whole shares, although most brokers cash out the fractions.
The only hassle is tracking that broker stock dividend calculations are accurate and timely.
Q. Why the sharp increase/spike?
A. The oil bubble increase/spike.
Expect the cost of finding new oil to go back to the mean.
Next time you present this idea, put up a chart comparing the dollar vs. MLPs (pipeline, gas, oil ..)
We do own KMP + EPD, TPP, DEP, SEP, etc.
The dividends they pay, as regular, 1099 - reports will show- are from income-tax-paying corporations (unlike the LP's and Holdrs, and grantor trusts, wherein the profits & losses flow through to the limited partners). The M. L.P.'s are set up to avoid having to pay income tax.
These holding companies (or Chapter C corporations, or RICs, or Limited Liability Funds, (e.g., KYE vs KYN) are paid a percentage of the LP's profits before the limited partners get theirs...the "parent" company, for instance KMR, may get 5% of the first NN profits; 10 % of the next OO profits, 20 % of the next PP "tranche of profits" from the Parrtnerships that it "sponsors" by holding a significant portion of the Publicly-Traded Limited Partnership securities, for its own account.
When the partnership's income is tremendous, the parent company may not pay out so much...but these are quite safe to hold in a tax-sheltered acct.: there's no K-1 to delay tax-filings in a regular account either.
There's also no benefit from MLP " tax-loss carry-forwards" in a tax-sheltered account; nor is there anything but a quasi capital loss from a return of capital (which many Closed-End Funds also use to manage their income streams of constant dividends...the shares go down in value as the ROC continues).
In contrast, in a short period in a taxable account, these "tax-sheltering" tricks can be useful by converting marginally taxed stream of dividends to a reduction of basis so that a long-term cap gain appears, if the MLP shares are sold before their basis becomes negative.
Even if the chance of a >$1000.00 total of Item 20 V on the various K-1s is low--if they were unknowingly placed in a sheltered account (Item 20 V is income to the limited partner from activities that are "Unrelated Business" vs. what the tax-shelter registration of the MLP states...maybe it sold a pipeline, or a gas storage facility, when its income is supposed to be royalties collected from transferring the fuels), the hassle of contacting the IRA's fiduciary, and getting them to file for a Tax Identification Number for the IRA, and then having them file the form 990t, to pay - from the IRA - the Unrelated Business Income Tax (UBIT)...is pretty costly, because of the charges the IRA fiduciary will make to do all this paperwork...lest the sheltered accounts become TAXABLE!,
On Jan 30 05:17 PM Chancer wrote:
> What i like about KMR is you do not pay tax on the stock dividends
> you receive (until you sell), and no matter what the market is doing,
> your average cost is going down every quarter. I now receive about
> 10% (of origninal shares) in additional shares each year. Holding
> for 10 years will more than double my shares with no additional cash
> investment required.
>
> My broker (unlike most) also accumulates fractional shares until
> I have more whole shares, although most brokers cash out the fractions.
>
>
> The only hassle is tracking that broker stock dividend calculations
> are accurate and timely.
On Jan 30 09:20 PM d_teller wrote:
> Yes, KMR or EEQ or any number of other LLC or "Holding Companies"
> or Parent companies of the Publicly Traded Partnership-shares of
> Master limited Partnerships are far better in a tax-sheltered account.
>
>
> The dividends they pay, as regular, 1099 - reports will show- are
> from income-tax-paying corporations (unlike the LP's and Holdrs,
> and grantor trusts, wherein the profits & losses flow through
> to the limited partners). The M. L.P.'s are set up to avoid having
> to pay income tax.
>
> These holding companies (or Chapter C corporations, or RICs, or
> Limited Liability Funds, (e.g., KYE vs KYN) are paid a percentage
> of the LP's profits before the limited partners get theirs...the
> "parent" company, for instance KMR, may get 5% of the first NN profits;
> 10 % of the next OO profits, 20 % of the next PP "tranche of profits"
> from the Parrtnerships that it "sponsors" by holding a significant
> portion of the Publicly-Traded Limited Partnership securities, for
> its own account.
>
> When the partnership's income is tremendous, the parent company may
> not pay out so much...but these are quite safe to hold in a tax-sheltered
> acct.: there's no K-1 to delay tax-filings in a regular account either.
>
>
> There's also no benefit from MLP " tax-loss carry-forwards" in a
> tax-sheltered account; nor is there anything but a quasi capital
> loss from a return of capital (which many Closed-End Funds also use
> to manage their income streams of constant dividends...the shares
> go down in value as the ROC continues).
>
> In contrast, in a short period in a taxable account, these "tax-sheltering"
> tricks can be useful by converting marginally taxed stream of dividends
> to a reduction of basis so that a long-term cap gain appears, if
> the MLP shares are sold before their basis becomes negative.
>
>
> Even if the chance of a >$1000.00 total of Item 20 V on the various
> K-1s is low--if they were unknowingly placed in a sheltered account
> (Item 20 V is income to the limited partner from activities that
> are "Unrelated Business" vs. what the tax-shelter registration of
> the MLP states...maybe it sold a pipeline, or a gas storage facility,
> when its income is supposed to be royalties collected from transferring
> the fuels), the hassle of contacting the IRA's fiduciary, and getting
> them to file for a Tax Identification Number for the IRA, and then
> having them file the form 990t, to pay - from the IRA - the Unrelated
> Business Income Tax (seekingalpha.com/symbo... pretty
> costly, because of the charges the IRA fiduciary will make to do
> all this paperwork...lest the sheltered accounts become TAXABLE!,