Kinder Morgan's Pipeline of Profits

Kinder Morgan (NYSE: KMI  ) may not be a household name, but it is a giant in the energy industry. The energy transportation, storage, and distribution company is composed of Kinder Morgan Energy (NYSE: KMP  ) , the Natural Gas Pipeline Company of America (NGPL), a retail natural gas distribution business, Kinder Morgan Power Company, Terasen Gas, and Kinder Morgan Canada. Add it all up, and the company operates approximately 43,000 miles of natural gas and petroleum product pipelines in North America.

Right now, the pipeline business is doing very well. Last Wednesday, Kinder Morgan announced that first-quarter earnings from continuing operations (excluding one-time charges) increased 29% to $1.54 per share, up from $1.19 a share in 2005. The results were driven by strong performance at NGPL, as well as at Terasen, a natural gas utility in British Columbia, which was acquired by Kinder Morgan in November 2005.

While Terasen has proven profitable, its acquisition has also added to Kinder Morgan's net debt, with the associated higher interest charges. Make no mistake, the pipeline business is capital-intensive, and a massive increase in interest rates will not bode well for Kinder Morgan.

Sharing the wealth
Management seems intent on sharing the wealth with shareholders. The quarterly dividend was increased in January to $0.875/share, producing a current dividend yield of 3.9%. There have been some ups and downs in the dividend in the past 10 years, but payments have been on a strong upward trend since 2002.

Perhaps one of the reasons for keeping shareholders in mind is that founder and CEO Richard Kinder continues to hold 18% of the company shares. This makes Kinder Morgan just one more example of a successful company where management continues to hold a large position, through the ups and downs of the business cycle. During the conference call, Richard Kinder indicated that he thinks the stock is undervalued and that he'd like to own more of the company. I am not a fan of management saying a stock is "undervalued." I am a fan when the CEO buys shares on the open market, like Richard Kinder did last October, adding nearly 7,000 shares to his personal stake.

In the past, the pipeline business has typically been viewed as a boring, dividend-paying investment. The pipeline collects its toll based on volumes. Volumes change slowly, while price flies all over the map. Investors who hold patiently and reinvest their dividends, slowly become rich by being operators of the toll bridge. Kinder Morgan has done very well for investors over the long haul. Looking ahead, the new projects at Kinder Morgan Energy, profitable acquisitions such as Terasen, and strong performance from NGPL offer Kinder Morgan investors substantial growth opportunities on top of this wonderful, boring business model.

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Fool contributor Robert Aronen owns none of the companies mentioned in this article. Feel free to share your comments with him. The Motley Fool has a disclosure policy.

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