After the close on Tuesday, Kinder Morgan Energy Partners (NYSE:KMP) released its 2014 guidance with a projected distribution of $5.58. Investors in Kinder Morgan Management (NYSE:KMR) will receive a commensurate stock dividend. Investors can read the full release here.
This budgeted distribution is 6% ahead of 2013's $5.28 expectation. However under the stewardship of Richard Kinder, the company has a history of exceeding expectations as 2013's distribution will beat expectations by 1% at $5.33. Using the actual distribution, KMP's payout growth is projected to be 5%. However, given the history of moderately conservative guidance that the company beats, I would not be surprised if we see another mild beat in 2014 with a distribution between $5.60 and $5.65 for another year of solid 5+% growth.
As discussed in a previous article on KMP, I forecasted a $5.59 payout in 2014, which should prove to be fairly accurate. At its current unit price of $81.62, KMP sports a solid 6.85% yield that makes it a perfect play for income and dividend growth investors alike. For investors with a required return of 8%, KMP is worth $101 assuming a long-term growth rate of 2.5%. However over the next 5-7 years, I expect KMP to grow at least twice as fast, which is why I believe KMP remains appreciably undervalued.
Kinder Morgan continues to aggressively grow its pipeline network, which will help management continue to grow distributable cash flow at 5-7%. The company has an investment backlog of $14 billion in growth projects, and the company expects to spend $3.6 billion on growth projects in 2014. With its current backlog, KMP has the capacity to expand its network by 30-35% over the next five years, which will help to consistently boost distributions for several years to come. With dramatically increasing U.S. production over the next five years thanks to major oil and gas fields throughout the country, KMP will maintain ample pricing power while simultaneously expanding its network of pipelines to boost returns even further.
I continue to believe Kinder Morgan Energy Partners is one of the best ways to play the energy boom in the United States. The vast majority of its business is toll based with charges based on oil volumes rather than oil prices. As a consequence, every dollar move in WTI impacts KMP's cash flow by no more than 0.125%. KMP gives investors exposure to increasing U.S. volumes without exposing them to a potential decline in prices due to increased supply or an elimination of the Middle East risk premium.
KMP's 2014 guidance shows that the company remains perfectly positioned to profit from the US energy boom. Even with a management that continues to exceed expectations, KMP has been left behind this year with a meager 2.3% gain. This drop allows investors to buy in at an extremely juicy 6.85% forward yield that should continue to grow by 5-7% annually through 2020 thanks to the significant backlog of growth projections. Moreover with management cutting its debt to equity ratio over the past year from 1.65 to 1.26, KMP has the capacity to fund new projects with a higher proportion of debt, which will further juice returns. At current prices, KMP is a steal and with reinvested dividends should provide double-digit returns over the next five years. With its growth prospects, I believe KMP is more fairly valued at $105-$110 and would definitely buy units here. Management has confirmed the growth story remains intact.
Disclosure: I am long KMP. 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.