Why Kinder Morgan Is Still a Buy

Trans Alaska pipeline. Source: Wikipedia

Sometimes the best choice is the most obvious one. Midstream master limited partnerships, or MLPs, are in demand these days for good reason: Investors are looking for reliable sources of income with decent yield and high cash flow visibility. Pipelines offer a good yield without some of the "junky" attributes of comparable assets such as high-yield sovereign or corporate bonds. 

One of the oldest and biggest players in the pipeline space is Kinder Morgan Inc  (NYSE: KMI  ) . Back when MLPs were just getting started as an asset class, Richard Kinder and David Morgan founded Kinder Morgan Energy Partners  (NYSE: KMP  ) based on the idea that there was much more oil and gas in the U.S. than originally thought. In particular, they believed that natural gas would soon flow from the Rockies (an area where Kinder and Morgan thought there would be great supply) to the northeast (the traditional source of demand).

While the Rockies prediction has not yet come true, the basic premise that there would be a huge need for hydrocarbon transportation was correct in a big way. Kinder Morgan has since established itself as one of the biggest players, with a focus in natural gas transportation. Right now I believe that Kinder Morgan is unfairly discounted when compared to other pipelines, and that it can be picked up right here at current prices. This article will focus on the partnership business, KMP. The chart below shows how badly KMP has lagged behind the other big pipelines. 

Yahoo finance 

As you can see, Kinder Morgan is down by about 7% over the last twelve months while Plains All American (NYSE: PAA  ) has been flat and Enterprise Products Partners (NYSE: EPD  ) has marched higher. The reason for Kinder Morgan's relative underperformance is a somewhat complicated ownership structure, concerns over growth, and a tight distribution coverage ratio.

The market's preference for Plains All American and Enterprise Products Partners is somewhat understandable. Both of these companies are looking to grow distributions by high single-digits, while Kinder Morgan Energy Partners is looking at 5%-6% distribution growth. In addition, Plains typically carries a distribution to distributable cash flow coverage ratio of around 1.1 times. Enterprise often has considerably more cushion at around 1.4 times. Kinder Morgan Energy Partners, however, typically distributes nearly all of its distributable cash flow, and carries a tighter ratio of just 1.01 times. It is true that there is less margin for error with Kinder Morgan. 

However, Kinder Morgan Energy Partners now yields just over 7%, which is significantly higher than Plains All American at 4.4% and Enterprise Products Partners at 3.8%. In fact, Kinder Morgan Energy Partners yields more than any of the large pipeline partnerships. As a dry gas-focused partnership, Kinder Morgan is exposed to the best long-term growth prospects, as the chart below shows.

Kinder Morgan investor relations

Management believes that over the next ten years, gas exports to Mexico will grow by over 50%, LNG exports will double, petrochemical use of natural gas will increase by 50%, and that dry gas electricity use will nearly triple. This is all thanks to recent discoveries which have made natural gas cheap and abundant. No other pipeline moves as much dry gas as Kinder Morgan, and about half of the partnership's revenue comes from this source. In regards to growth over the long-term, Kinder Morgan has an advantage over the other pipelines. 

Bottom line
There's no doubt that other pipelines have higher coverage ratios and better short-term growth prospects than Kinder Morgan Energy Partners. However, the partnership's focus on the steady, secular growth of natural gas use will benefit it more than most of its competitors over the next decade. At this time, units of Kinder Morgan yield a very generous 7%, and I believe they are a buy right here. 

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 12, 2014, at 10:29 PM, ferdiefor wrote:


    I would say a great many midstream MLPs have superior growth prospects because of lower cost of capital. For all the billions of capex ahead for KMP the problem is the law of large numbers does not move the needle of dcf growth and distribution growth the way it did when KMP was a much smaller MLP.

    Five years from now a great many MLPs will have ten year total returns eclipsing KMP as they have eclipsed them in their five year charts.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2986352, ~/Articles/ArticleHandler.aspx, 8/28/2015 6:46:20 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Casey Hoerth

Casey is Fool contributor covering Energy companies, and sometimes dividend payers, in general. Follow me at

Today's Market

updated Moments ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:02 PM
EPD $28.62 Up +0.16 +0.56%
Enterprise Product… CAPS Rating: *****
KMI $32.63 Up +0.63 +1.97%
Kinder Morgan CAPS Rating: *****
KMP $0.00 Down +0.00 +0.00%
Kinder Morgan Ener… CAPS Rating: *****
PAA $35.51 Up +0.56 +1.60%
Plains All America… CAPS Rating: *****