The pipeline MLP, Kinder Morgan Energy Partners L.P. (KMP) has been a great, growing income producer for investors since going public 20 years ago. The distributions paid by KMP have increased steadily and have never declined. Investors who own Kinder Morgan Energy Partners shares should be very happy with their investment. The discussion here concerns whether the company holding the general partner rights of KMP - Kinder Morgan Inc. (KMI) - could provide a boost to the Kinder Morgan investment performance as an add-on investment.
Kinder Morgan Inc. was taken private in 2007 via leveraged buyout and came back into the public markets with a February 2011 IPO. Besides the general partner interests, Kinder Morgan Inc. owns 9% of the outstanding KMP units and 14% of the i-shares version of KMP - Kinder Morgan Management, LLC (KMR). Kinder Morgan Inc. generates 99% of its cash flow from KMP/KMR LP - 11% - and GP - 88% - distributions.
The general partner incentive distribution rights - IDR - result in Kinder Morgan Inc. receiving one-half of any distribution increases initiated by Kinder Morgan Energy Partners. In 2011, KMP forecasts to pay a total of $3.1 billion in distributions. Of that amount, $1.6 billion will go to Kinder Morgan, Inc.
The result of the general partner distribution rules is that the income received by Kinder Morgan, Inc. will grow at a rate twice as fast as the rate of distribution increases by Kinder Morgan Energy Partners. As the company currently stands, the KMP distributions are targeted to grow 5% annually and the KMI dividends should increase at a 10% annual rate.
As an additional benefit, the Kinder Morgan purchase of El Paso Corporation (EP) is expected to close in the next few months and once the purchase is complete and the various assets moved around and/or sold off, the rate of distribution increases is expected to improve. Kinder Morgan management has forecast that after the El Paso purchase is completed, the distributions from Kinder Morgan Energy Partners will grow at a 7.5% annual rate and the Kinder Morgan Inc. dividend will increase by 12.5% per year through at least 2015.
If the dividend a stock pays increases and the yield is to remain the same, the share price should increase by the amount of the dividend increase. If Kinder Morgan meets its distribution growth forecasts, KMP investors can look forward to a total annual return of 13.5% - 6% from distributions and 7.5% share appreciation. The total return for KMI works out to 16.3%, based on the current 3.8% dividend yield. Stretching this over a multi-year period to allow for compounding shows a significant return advantage for KMI. Compounding 13.5% for five years works out to a 190% total return - assuming reinvestment. The 16.3% compounded produces a gain of 213%. Looking at just the share price, 12.5% growth produces a double in six years and with 7.5% growth it takes 10 years to double. By that time the higher growth rate shares have almost doubled again.
So take a close look at Kinder Morgan Inc. During the El Paso absorption process the KMI share price may make a retracement, providing an excellent buying opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.