Kinder Morgan (KMP): 'Paragon of consistency'

"Kinder Morgan Energy Partners L.P. (NYSE: KMP) is a paragon of consistency; the stock continues to rise and the company continues to deliver on its expectations," says Jack Adamo.

In his Insiders Plus newsletter, he explains, "The master limited partnership has made great strides in cost controls to compensate for the weak economic environment. When things turn around, it could really take off."

"KMP is one of the largest and most respected pipeline and energy storage LPs in North America. It operates or owns interests in more than 26,000 miles of pipelines and 170 terminals.

"Its pipelines transport crude oil, natural gas, fuels, other distillates, ethanol and CO2. Its terminals store petroleum products and chemicals and handle bulk materials like coal and petroleum coke.

"KMP is also the leading provider of CO2 for enhanced oil recovery projects in the United States. That’s the system by which CO2 is injected into oil wells to force the oil to the surface.

"There’s long-term growth potential in that business because it’s a way to use the most common greenhouse gas while sequestering it from the external environment.

"As a Master Limited Partnership, Kinder Morgan is a pass-through vehicle for tax purposes. The company pays no corporate taxes, but pays out its income directly to you, similar to REITs.

"It is best not to buy them in tax-deferred accounts because that negates some of their tax advantages.

"Since MLPs distribute most of their cash flow, they periodically need to raise capital through secondary stock offerings and debt.

"KMP continues to have easy access to the capital markets at very attractive rates, while providing great long-term returns, despite the growing share base.

"The company has steadily increased its income distributions in the last 5 years at a compound annual rate of 8.8%, and at a 13.5% rate over the 16 years it has been publicly traded.

"If it can continue to grow at even a 5% rate, combined with its current dividend yield of 7.7% it will provide returns that trounce the market for the foreseeable future. I think it can easily do that.

"KMP, along with most publicly traded LPs of this type, tends to move in spurts. While the dividends keep growing steadily, the demand for the stock wanes during periods when the public thinks it can make a killing buying sexier stocks with gaudy short-term growth prospects.

"Then, when the bloom is off the hyper-growth rose, investors gravitate back toward more reliable, steady prospects. I think we’re entering another flight-to-quality era. We already see strength returning to the MLPs.

"After the market collapses again, that trend will only accelerate. We baby boomers cannot afford another hit to our retirement funds. 

"The gambling gene will turn recessive, and we will learn to live with more realistic expectations. The entire complex of stocks with income and steady growth will benefit, and so will their owners. That will be us.

"KMP had a good quarter for the current environment, and remains on track for its projected payout this year. The firm is extremely well managed by one of its founders, Richard Kinder.

"He takes no salary, but is a large shareholder. The units are 8.5% Insider owned and its sister units that pay dividends in additional shares, rather than cash, are 14% Insider owned. 

"As with all MLPs and REITs, its distributions typically exceed its book income because of non-cash, non-essential depreciation and tax credits. This makes its payout ratio look high, but that’s an illusion, and its balance sheet is among the best in the business."