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Summary

  • KMR has gained more than the other two stocks during the last five years.
  • Total return of KMR has been substantially higher than KMP and KMI.
  • Average annual return of 22% for KMR easily beats the average annual return figures of 9% for KMI and 18% for KMP.

Kinder Morgan group has some of the most exciting stocks in the energy sector - the performance of these stocks has been impressive and these stocks have allowed their holders to earn substantial cash return in the shape of cash distributions and dividends. The overall performance of these stocks has been in debate for some time now - in this article, we will compare the performance of the three stocks and try to determine which stock is the best pick. Before that we would briefly discuss the structure of these companies in order to have a better understanding of the matter.

First in focus is Kinder Morgan Energy Partners (NYSE:KMP). This is a master limited partnership which gives cash distributions rather than dividends. The tax advantages of the master limited partnerships make them an attractive investment for income investors. Partnerships do not pay corporate taxes and return almost all the cash to its unitholders after retaining the maintenance capital. You can read our detailed analysis of KMP here.

Second is Kinder Morgan Management (NYSE:KMR). This unit is a limited partner that manages the operations and business affairs of KMP. KMR owns no properties of its own and its progress depends on KMP's performance. The only assets owned by KMR are KMP's shares - KMP issues new i-units to KMR in place of cash distributions, and KMR issues new shares or fraction to its shareholders.

The third unit of Kinder Morgan family is Kinder Morgan Inc. (NYSE:KMI), which holds the general partner interest in KMP and El Paso Pipelines, and some limited interest in KMP. KMI is a holding company and distributes almost all the cash to shareholders in the shape of dividends. We have discussed KMI in detail here.

Price Comparison

KMR has risen by over about 60% during the last five years as compared to KMP's gain of over 52% and KMI's gain of about 12%. The trend in the stock price is somewhat surprising as we have seen increased interest in the income stocks over the last few years as the interest rates have been on record low levels. Since KMR does not pay any cash dividends or cash distributions; it is interesting that it has outperformed the other two stocks. KMI has also slightly outperformed KMP - being the general partner, KMI gets a considerable portion of the total distributable cash flows of KMP, which makes it an attractive investment for the income hunters.

We have looked at the price comparison - let's now look at the cash dividends/distributions. The table below shows the dividends and cash distributions by these stocks:

 

2009 (last two quarters

2010

2011

2012

2013

2014 (first two payments)

KMP

$2.10

$4.32

$4.58

$4.85

$5.26

$2.74

KMI

-

-

$0.74

$1.34

$1.56

$0.83

According to the table above, it is clear that the Kinder Morgan group rewards its shareholders well in terms of cash dividends/distributions - the growth in cash distributions/dividends has been impressive. If an investor held the KMP unit or KMI stock from the starting point of our analysis (mid of 2009); total cash return for the KMP unit holder will be $19 and $4.47 for KMI shareholder. Let's assume that an investor bought a KMI share at the IPO price of $30 in 2011 - for this investor, the total cash return till now is almost 15% -- if we take into account the price return of the stock since the IPO, the total return for the owner of KMI stock becomes about 27%, or average annual total return of 9%.

KMP was trading close to $50 at the end of June 2009 - assuming an investor bought a share at that price and is currently holding; his/her cash return is equal to 38% -- taking into account the price return, the total return over the last five years is 90%, or average annual return of over 18%. Investment in KMP has outperformed KMI by a substantial margin- however, the time horizon for both these dividend/cash-paying stocks has been different due to KMI going public in 2011.

Now let's assume that the same investor bought a stock of KMR at the end of June 2009 - since then, KMR has paid 0.330192 in stock dividends. So, the investor now has about 1.3 shares of KMR. At the end of June 2009, KMR was trading close to $45. So, the current value of the investment is close to $94, which means the total return for KMR shareholder has been close to 108%, and average annual return is close to 22%. Clearly, KMR has been the best investment on the basis of total return as well.

Conclusion

Based on the analysis done, it is clear that KMR is the best in terms of growth. However, it has its limitations as the dividends are paid in terms of shares. But it is still the best option from the group as the total return for the stock has been the highest. However, there might be some tax concerns at the time of selling the stock. On the other hand, KMI and KMP shareholders pay tax on the dividend they receive.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.

Source: Is KMR The Best Stock In The Kinder Morgan Group?