Fastball Financial

Sometimes big opportunities lie in the places that aren’t viewed as sexy by most people.  Consider the case of Kinder Morgan Energy Partners (KMP), a pipeline transportation and storage company, and a member of our 10 Stock Portfolio for 2012.  If you want to find out how not sexy this company is, listen to its quarterly conference calls.  It is loaded with details about each of its segments.  For an analyst, it can be heavenly.  For anyone else, it can cure insomnia.  But not investing in KMP because it seems boring is a mistake.

Dividends

Being a Master Limited Partnership (MLP), Kinder Morgan Energy must distribute most if its earnings in the form of a dividend.  This dividend is what draws investors to MLPs such as Kinder Morgan Energy, which currently has a historic 6.3% yield.  The word “historic” is key because it looks at last year’s payout compared to the current stock price.  If you factor in growth, the actual yield for 2012 will be even higher.  For example, KMP paid out dividends of $4.61 in 2011.  The company plans to pay out $4.98 in 2012, bringing the dividend yield to 6.6% for 2012.  That is a nice income stream to count on regardless of market or individual stock volatility.

For some perspective on the yield alone, here is how Kinder Morgan Energy’s yield compares to some others:

• Buckeye Partners (BPL) = 8.1%
• Boardwalk Pipleine Partners (BWP) = 8.1%
• Enterprise Products Partners (EPD) = 5.1%
• Entergy Transfer Partners (ETP) = 8.0%
• Magellan Midstream Partners (MMP) = 4.9%
• Plains All American Pipeline (PAA) = 5.3%

All of these companies are different sizes and have different complexities and levels of execution.  What’s important is to note that Kinder Morgan Energy has a better dividend that many, but not necessarily all companies in their industry.  It’s important then to look at both past execution and future prospects.

Growth

KMP has had no difficulty expanding organically, as indicated by their consistent dividend increases over the years.  However, their recent acquisition of El Paso stands to add tremendously to their already aggressive expansion in the natural gas transportation segment.  Management expects 7% growth in 2012 with the El Paso acquisition.  In a longer-term view, natural gas transportation has the potential to expand at an even faster pace.  Domestic natural gas drilling activity has increased at incredible rates over the past several years. 

Higher natural gas prices would certainly help keep drilling going at these levels, but that should level out in time regardless.  That’s the benefit of being a transportation and storage company.  Some drillers will get bigger, while others go out of business, but KMP enjoys receiving business from anybody who needs to move or store their product.  Drilling may slow if natural gas prices stay low, but it would then stand to reason that natural gas prices would rise with the decrease in supply and then drilling would quickly pick-up again to take advantage of the higher prices, making any such production drop temporary.

Risks

The biggest risk for KMP is likely its own execution and staying ahead of trends as they develop domestically.  While the company has grown very steadily over time, its quarterly earnings have been inconsistent, making for a bumpy ride higher.  There hasn’t been much predictability when it comes to beating or missing consensus earnings estimates.  However, growth is growth regardless of which quarters it appears.

Opportunity

Kinder Morgan Energy recently announced a secondary stock offering.  This dropped the stock into the mid-70s.  It’s tough to take if you owned the stock, but if you were waiting for an opportunity to buy, Kinder Morgan gave it to you with this secondary offering.  The extra cash will be used to further invest and expand their business, which in theory will increase their distributions in the future.  With a 6.6% yield for 2012 and an opportunity for that payout to increase in the future, KMP should provide excellent, consistent returns for years to come.

Steady

Just like every portfolio needs stocks that can offer huge upside, every portfolio needs stocks that can provide a steady stream of income, regardless of market or individual stock volatility.  KMP offers a relatively easily defendable valuation based off its expected dividend payout and offers additional upside potential through unexpected growth opportunities.

Disclosure: Dave does not currently own any of the stocks mentioned above, but may purchase KMP in the near future.