Market Wrongly Undervaluing Kinder Morgan Energy Partners

| About: Kinder Morgan (KMP)
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In spite of steady and attractive distribution growth, Kinder Morgan Energy Partners LP (KMP) has lagged in the midstream sector for close to two years. The period of under-performance has turned KMP into a very attractive yield and growing distribution play right now. If you are interested in a 7% yield and ongoing 15% total return, get ready to take a closer look at Kinder Morgan Energy Partners.

Note: MLP companies such as Kinder Morgan Partners LP have units and pay distributions. The words stock, shares and dividends may be used here with the understanding that the rules of MLP units apply including the tax consequences of investing in MLP units.

Stable Revenue Base Mated With Large Amounts of Capital Growth Spending

For investors, Kinder Morgan Energy Partners brings stability from its large cap status and a focus on fee-based revenue streams. During an energy symposium presentation earlier this month, the company stated that 82% of the budgeted 2014 cash flow will be fee based, and 94% of next year's forecast cash flow is either fee-based or hedged. The Kinder Morgan companies take annual budget projections to a new level, with weekly meetings to review results vs. the budget and to discuss what a specific part of the business must do to get back or ahead of budget. The attention to the financial details has allowed Kinder Morgan Energy Partners to hit or exceed the budgeted dividend payment for 13 out of the last 14 years. The exception occurred in 2006 when the company missed the forecast $3.28 per unit distributions by two cents.

Growth for Kinder Morgan Energy Partners is derived from capital spending projects to either construct new assets, expand currently owned facilities or the purchases of existing midstream assets from other companies - including the purchase of entire multi-billion dollar valuation enterprises. Growth is funded with a combination of borrowed money and the issue of additional MLP units. With the large-cap midstream MLPs such as Kinder Morgan Energy Partners, the large size of these companies allow them to take on projects that smaller MLPs could not consider attempting to undertake. For 2014, the Kinder Morgan Energy Partners growth capital spending budget is $3.6 billion, an amount greater than the total market cap of 60% of the 75 midstream MLP companies found using the screener on the Find MLPs page of the website. The planned billions of growth spending do not include any opportunistic acquisitions that may arise during the year. Kinder Morgan Partners set up the financing and projected revenue of any and all growth and purchases to be cash flow accretive to unit holding investors.

A Quick and Dirty Comparison System

The handful of large-cap midstream MLP companies all exhibit the same characteristics of stable, fee-based revenue streams and the ability to grow distributions through expansions and acquisitions as outlined above concerning Kinder Morgan Energy Partners. To pick among the choices such as KMP, Oneok Partners LP (OKS), Enterprise Product Partners LP (NYSE:EPD), Energy Transfer Partners, LP (NYSE:ETP), Plains All American Pipeline LP (PAA) or Williams Partners LP (NYSE:WPZ), I like to focus on a combination of current yield plus the distribution growth rate. To provide an additional check on the safety of the dividend rate, the distributable cash flow coverage ratio shows how much money an MLP had available for distribution compared to how much it paid out. A number greater than one is highly desirable and less than one means that the MLP is counting on future revenue growth to cover the distribution rate it is already paying.

A comparison chart using data provided by let's us make a number by number comparison of the income potential from investments in the largest midstream MLP companies:

Midstream MLP Distribution Characteristics

Symbol Yield Growth Coverage
EPD 4.40% 7% 1.53
ETP 6.93% 0% 1.03
KMP 6.89% 8% 1.10
OKS 5.75% 11% 0.98
PAA 4.84% 10% 1.27
WPZ 7.16% 9% 0.90

You can see from the data that Kinder Morgan Energy Partners currently provides a yield near the top of its peer group while also providing an attractive rate of distribution growth and an adequate rate of distribution coverage. The data used in the chart is historical for the trailing one year period.

For 2014, Kinder Morgan is forecasting a total distribution of $5.58 per KMP unit, up 4.7% from the $5.33 to be paid for full 2013. The $5.33 for 2013 is a nickel higher than the forecast $5.28 per unit published at the end of 2012. Kinder Morgan management has stated that they are working towards 5% to 6% distribution growth for KMP for the next 3 to 5 years.

The projected $5.58 in distributions puts a 7% forward yield on the current $79.60 unit price. This yield is well above where the market has driven the KMP yield over the last several years. To push the yield down to a more typical 6.5%, the unit price will increase to about $86. This share price gain plus the dividend for next year produces a total return in 2014 of just over 14%. I view this as a very nice return for an income investment producing a near 7% yield.

Chart Source

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