Don't Let Rising Bond Yields Push You To Sell This Winner

| About: Kinder Morgan (KMP)

Since the Federal Reserve begin its Quantitative Easing program during the heart of the recession bond yields have fallen exponentially to historically low levels. This easing has caused the 30 year treasury to trade as low as 2.50%. The new low rate environment has been great for current and would be home owners to be able to refinance or buy a new home at record low rates. These low rates have also been great for a lot of businesses enabling them to take on increased debt or refinance existing debt at a very low rate.

Unfortunately, the individuals that this low rate environment has punished the most have been the retired and savers. Record low yields have caused the average return on bond investments, CDs, and savings accounts to be virtually zero, making the real rate of return for these individuals to be negative. This has caused yield hungry investors to go hunting in places that they historically would not go, stocks.

Higher yielding dividend stocks have seen a great deal of price appreciation during this recovery simply because of the high demand for yield. High quality blue chips like AT&T (NYSE:T), Verizon Wireless (NYSE:VZ), General Electric (NYSE:GE), Intel Corp. (NASDAQ:INTC), Johnson & Johnson (NYSE:JNJ), McDonald's (NYSE:MCD), Procter & Gamble (NYSE:PG), Pfizer (NYSE:PFE), and The Travelers Company (NYSE:TRV) have seen a great deal of price appreciation due the higher than average yields and payout consistency associated with these firms.

Another area of the market that has received a great deal of interest in the past several years is the Master Limited Partnership (more common known as MLPs) sector. This MLP sector of the market is heavily weighted toward the oil and gas industry and since they are master limited partnerships, the majority of the income the firms produce is passed directly onto shareholders via a dividend payment. This results in very large quarterly dividend payments that can total up to 7% - 10% annually.

Since last week when the Federal Reserve hinted at the idea of starting to step down their Quantitative Easing program, bond yields have started to tick back up triggering a run for the exits on these higher yielding stocks for 'saver' investments. One of the names that has gotten hit the hardest in the past week is Kinder Morgan Energy Partners (NYSE:KMP).

With the ever growing oil and gas boom happening in this country Kinder Morgan Energy Partners is posed for rapid growth. Kinder Morgan Energy Partners is part of the larger company Kinder Morgan (NYSE:KMI). Kinder Morgan is the third largest energy company in the U.S. by enterprise value (roughly $115 billion) and is primarily in the business of oil and gas transportation by pipeline. Kinder Morgan owns and operates roughly 80,000 miles of pipelines at 180 terminals. The pipelines can transport anything from natural gas, gasoline, crude oil, and CO2. The terminals are able to store all types of petroleum products and chemicals. The terminals are even able to handle such products as ethanol, coal, and steel. Aside from Kinder Morgan Energy Partners, Kinder Morgan has other partner interests that include, El Paso Pipeline Partners, L.P. (NYSE:EPB).

The reason pipelines are going to become so important in this sector is because currently the location of all of this shale is in the middle of the country, while majority of the country's refineries are located on the coasts. In order to refine the fuel for use it must be transported to the coast. Currently due to the limited pipeline infrastructure this is done via semi-truck or rail, not exactly the most efficient or economical means of transportation. When KMP builds a pipeline oil companies pay KMP a fee for access and use of the pipeline. Since the capital investment to make and place pipelines are not completely crazy the company is able to quickly monetize the newly constructed pipeline with a very healthy margin.

Kinder Morgan Energy Partners over the past week has dropped from roughly $88 per share to $83. This drop has represented a 6% decreased in stock price. Yet, nothing fundamental has changed at the company to trigger such a large sell-off. If anything, the news coming out of the company has been quite the opposite. About two weeks ago Kinder Morgan announced that it had increased its 2013 projections. "We believe the recently acquired Copano assets will provide significant growth opportunities by enabling us to broaden our midstream services footprint and offer a wider array of services to our customers, which will benefit KMI shareholders and KMP unit holders," said Kinder Morgan Chairman and CEO Richard D. Kinder. The company has also decided to increase its dividend distribution for all segments. Specifically for Kinder Morgan Energy Partners the firm now expects to payout $5.33 per share, this is a 1% increase from the original forecast of $5.28 per share.

Aside from the better than expected 2013 forecast, the company has solid financials that continue to improve year-over-year. Revenue for Q4 of 2012 came in at $8.64 billion which compared to Q4 revenue for 2011 of $7.88 billion and 2010 of $7.74 billion. Margins also continue to increase. At the end of Q4 2012 KMP had a profit margin of 48%, compared to Q4 of 2011 at 39.5% and 2010 of 37.1%. Free cash flow continues to also be strong ending Q4 of 2012 at $1.3 billion.

Increasing revenues and free cash flow are especially important when investing in MLPs because the future of the dividend is at stake and more often than not MLPs get themselves into situations where the dividend payout ratio is not sustainable due to decreased operations, higher costs, or poor management of capital. Luckily, in the case of KMP none of those situations are affecting the company and the stock price and financials speak to that success.

KMP currently has a book value of $31.28 per share and currently trades with a P/E of 38.82. Now, I will be the first to admit that a P/E of 38.82 seems high and it is. My only rationale for being comfortable with a P/E that high is the fact that the company should be viewed as a growth stock in a rapidly growing and expanding growth sector. I know it's not an apples-to-apples comparison, but other growth names like Amazon (NASDAQ:AMZN) and Netflix Inc. (NASDAQ:NFLX) have P/E ratios in the triple digits and are much more unreasonable than that of KMP. To help provide even more perspective on KMP and its valuation below I have a chart that compares KMP to the competition.


Stock Price



Market Cap

Kinder Morgan Energy Partners




32.02 B

Magellan Midstream Partners (NYSE:MMP)




11.77 B

Enterprise Products Partners (NYSE:EPD)




54.65 B

Targa Resource Partners (NYSE:NGLS)




4.79 B

El Paso Pipeline Partners




9.13 B

Buckeye Partners (NYSE:BPL)




6.98 B

Williams Partners (NYSE:WPZ)




19.88 B

Regency Energy Partners (NYSE:RGP)



- 429.16

5.21 B

Boardwalk Pipeline Partners (NYSE:BWP)




7.49 B

Suburban Propane Partners (NYSE:SPH)




2.64 B

Energy Transfer Partners (NYSE:ETP)




18.12 B

Click to enlarge

The above chart highlights several MLPs that are all involved in either the pipeline or petroleum industry and all have comparable yields. Aside from Enterprise Products Partners, KMP is the clear outliner from a sheer size and stock price vs. P/E standpoint. I like KMP better than Enterprise Products Partners simply because I feel they are better managed, have greater opportunity in the shale industry, and frankly have a higher yield.

As the major oil companies in this country like Exxon Mobil (NYSE:XOM), Conoco Phillips (NYSE:COP), and Chevron (NYSE:CVX) continue develop this country's shale plays the demand for better and more economical means of transportation of that fuel will continue to grow. Kinder Morgan over the years has continued to make very well-placed acquisitions while continuing to develop its infrastructure. This has allowed the company to be in an excellent position to capitalize on that demand and service those transportation needs.

Disclosure: I am long COP, KMP, INTC, T. 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.