Kinder Morgan Energy Partners - Dividend Analysis

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. It operates in five segments: Products Pipelines, natural gas pipelines, CO2, Terminals, and Trans Mountain.

Kinder Morgan Energy Partners is a not dividend aristocrat but is a dividend achiever. It has been increasing its dividends for the past 12 consecutive years. Over that period the company has delivered an average total return of 20.00 % annually to its loyal shareholders.
At the same time the company has managed to deliver an impressive 21.30 % average annual increase in its net income from 1998 to 2007.
The ROE increased from a low of 7% in 1998 to a high of 24 % in 2006, before decreasing to 13 % in 2007.

Annual dividend payments have increased over the past 10 years by an average of 15.30% annually, which is lower than the growth in net income. A 15% growth in dividends translates into the dividend payment doubling almost every five years. If we look at historical data, going as far back as 1993, KMP has indeed managed to double its dividend payments almost every five years.
If we invested $100,000 in KMP on December 31, 1997 we would have bought 5903 shares (adjusted for a 2:1 split in August 2001). Your first quarterly check would have been $1658.75 in January 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly payment would have risen to $9920.24 by October 2007. For a period of 10 years, your quarterly dividend has increased by 213 %. If you reinvested it though, your quarterly dividend would have increased by 498%.
The dividend payout has remained above 100% for the majority of our study period. When put into the perspective of the past 10 year’s average though, it looks pretty normal for the company. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that KMP is attractively valued at its current price/earnings multiple and solid dividend growth. The company also boasts an above average dividend yield.

Full Disclosure: I own KMP

Comments

[metal27:]

KMP is a master limited partnership, not a corporation. It pays distributions to its unit holders, not dividends to stockholders. That distinction is important, because of the significant differences in business model and tax treatment.

Otherwise, the article is a nice recital of easily available financial information, but it does not touch on the nature of the pipeline business or KMP's future. With the recent completion of the Rockies Express pipeline and other major capital projects, distributions should increase more rapidly than in recent years.

And there is a nice irony for people who remember Enron--Rich Kinder founded his dynasty of pipeline MLPs after being passed over for the CEO job at Enron in favor of Jeff Skilling. Kinder then bought Enron's pipelines from then and went on to succeed where they could not.

2008 May 21 02:29 AM

[sjdiii:]

How does KYE compare to KMP?

2008 May 21 10:43 AM

[Chancer:]

For those who don't need the cash, I prefer KMR which pays its dividends in more shares. Your cost basis goes down every quarter when you receive the stock dividend. You pay no taxes until you sell your shares. The biggest "problem" is fractional shares that most brokers pay in cash. A few brokers accumulate the fractional shares for more full shares.

2008 May 21 12:55 PM