Proposed buy boosts Kinder Morgan Energy

The already-healthy dividend from the energy company could get an increase with the acquisition of El Paso.

By Jim J. Jubak Feb 24, 2012 3:48PM
Image: Oil drums (© Kevin Phillips/Digital Vision/age fotostock)In my Feb. 3 post, I added three stocks to my dividend income portfolio and dropped three.

The reason, I argued then, was that the growing popularity of dividend-paying stocks at a time when income vehicles such as Treasuries and CDs pay almost nothing had created a glorious but still real problem for income investors. 

As investors flocked into dividend-paying shares, they drove up share prices. That was great for investors already fully invested, but for investors looking to get into new positions or for investors looking to put more cash into existing positions, it meant that yields were in constant danger of erosion. 

In this situation, income investors needed to look for stocks that paid higher yields now and that were also positioned -- by their growing cash flows and by management disposition -- to keep raising dividends. Look for those stocks, I advised, and beware dividend payers that didn't seem to be in a position to keep raising dividends.

And with that as background, I tweaked this portfolio by adding General Electric (GE), Westpac
Banking (WBK) and Kinder Morgan Energy Partners (KMP) while dropping Potlatch (PCH), Merck (MRK) and Abbott Laboratories (ABT).

I'm going to give you more detail on one of those adds, Kinder Morgan Energy Partners (and also actually make the change on the dividend portfolio page. The remaining three changes will follow in what I will try to make short order.)

Deciding to invest in an income vehicle such as a real estate investment trust (REIT) or a master limited partnership (MLP) rests on these factors: You want to see the cash flow to keep current payments to unit holders, and you want to see a path forward that would increase payments over time.

The Great Recession was a big test for Kinder Morgan Energy Partners. As the U.S. economy slowed, revenue from its network of pipelines fell too. Cash flow from operations bottomed at $518 million in the first quarter of 2011. Since then, the rebound has been extremely strong, with cash flow from operations climbing to $1.25 billion in the second quarter of 2011 to $1.98 billion in the third quarter to $2.87 billion in the fourth quarter.

That let the company raise dividend payouts from $538 million in the first quarter of 2011 to $2.24 billion in the fourth quarter of 2011.

Great, but investors need to ask not just "what have you done for me lately" but also "what will you do for me tomorrow?"

Master limited partnerships make money by borrowing (since they pay out most of their net income, they don't have a lot of retained earnings to re-invest) and then using that borrowed cash to invest in assets with a rate of return above what they’ve paying on the money they've borrowed.

The challenge right now isn’t borrowing cheaply -- for a company like Kinder Morgan Partners, money is cheap and plentiful -- but finding enough new projects with high enough potential returns.

That’s where the proposed acquisition of El Paso (EP) by Kinder Morgan (KMI), which acts as general partner for Kinder Morgan Energy Partners. If the deal goes through, and I think it will despite an attempt by some shareholders to stay the March 6 vote, Kinder Morgan would be able to drop El Paso pipeline assets down to the Kinder Morgan Energy Partners master limited partnership (in return for cash, of course.) 

That growth pathway would increase the earning assets at the master limited partnership and enable Kinder Morgan Energy Partners to increase distributions by about 6% a year, Morningstar calculates. (Without the El Paso deal and those assets, Morningstar puts the annual increase at a not-too-shabby 4%.)

Kinder Morgan Energy Partners currently pays a 5.1% dividend.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of Kinder Morgan Energy Partners as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

Tags: ABTGEinvesting strategyinvestmentsJim JubakKMPMRKPCHWBK
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5Comments
Doug (Out in the cold)
Feb 25, 2012 3:04PM
avatar
Natural gas is an excellent source for cost effective and reliable energy.  Japan's government reports that the area around Fukushima may not be livable forever due to high radiation levels as a result of the earthquake and tsunami last year.  With North America becoming the center of the new world energy picture, it may be about time the US considering becoming an exporter like the mid-east without all the tensions of disruptions.  Clean up the environment, balance the trade deficit, reduce America's dependence on foreign oil imports, put America to work, and the spin-off might even help the depressed housing market .. unless of course, someone wants to invest in concrete to cover the "hot" no-go parking lots.
Boo Diggz
Feb 24, 2012 4:54PM
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How do you claim you own these in your Divdend Portfolio then have a disclaimer at the end contradicting all of that? Plus you were recommending Merck a month ago by the way.
Doug (Out in the cold)
Feb 24, 2012 5:42PM
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Bela Ghostly .. you had better get use to having Obama in the White House, because looking over the GOP candidates and endless debates .. well, it might be advisable to get on the winning side for a change.  Big Oil might have already been investing in alternative fuel sources .. if you read the trade journals.  Algae is just one of a number of alternative supplies to meet the future energy needs. 
Re-TOG Re-TOG (Re-TOG)
Feb 24, 2012 9:46PM
avatar

Geez.....I just read the article for some updates and opinions on KMP, what TF is all this BS about Obumba/Obama......We​​ have owned KMP for a few years and it has been fantastic...

We are investors, and I like Jubaki and his commentary...Why are you here talking about  the Prez. that's doing about as good a job as he can; Considering whose holding the purse strings...

 

You not only look ghastly you also appear to be pretty ignorant too....

Try and get a life before Monday or next week, before the DOW locks over 13K and you have missed the ride. 

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