The next selection for the newly launched Inflation-Protected Income Growth Portfolio is pipeline giant Kinder Morgan (NYSE:KMI). This pick is part of one of the most complicated corporate structures out there and a stock that has only recently been reoffered to the public. The overall company's reputation for dividend payment and growth, rather than this particular stock's, provides the key reasons to believe that the dividend will continue to rise.
This particular stock has only been public for less than two years, though it did have a prior stint as a publicly traded company before being taken private in a leveraged buyout. The company's other two primary parts, Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) and Kinder Morgan Management (UNKNOWN:KMR.DL) have longer continuous public histories and decent track records of dividend payment and growth. With its recent acquisition of El Paso Pipeline Partners (UNKNOWN:EPB.DL), Kinder Morgan is now the largest midstream energy company in North America.
The KMI shares own the general partner behind the pipeline empire and get an incentive distribution for that role. That incentive distribution is the key reason to believe the KMI stock can quickly establish itself as a strong member of the dividend growth community.
Why it's worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio diversification perspective.
- Payment: The company's annual dividend currently sits at $1.44 a share, a yield of better than 4.1% based on Thursday's closing price.
- Growth history: The company's most recent dividend was 20% higher than the equivalent period's dividend a year earlier. The company has publicly forecast that its 2013 dividends are expected to be $1.57 a share -- already setting itself up for growth next year.
- Reason to believe the growth can continue: As the general partner in what is essentially a "tollbooth" business, Kinder Morgan makes money whenever energy products or carbon dioxide passes through its pipelines. The quantity that moves, rather than the price of that commodity, is the big driver of the company's value, and as long as we're an energy-dependent economy, there'll be demand to move that stuff around.
Balance sheet and valuation:
- Balance sheet: A debt-to-equity ratio of 1.5 indicates that the company does use debt, but reasonably, and it hasn't overleveraged itself to the point where a near-term financial hiccup would derail it.
- Valuation: By a dividend discount model analysis, the company looks to be worth around $36.16 a share, making its recent market price of $34.77 a share look reasonable. Of course, there's some risk involved. For instance, as TransCanada found out when the U.S. government blocked the Keystone XL pipeline, there can be strong opposition to new pipeline construction. That can put a damper on future growth opportunities for KMI.
The previous picks for the portfolio included:
- An industrial conglomerate
- A generic-pharmaceutical powerhouse
- A provider of staple foods
- An auto parts distributor
- A safety equipment provider
- A high-tech titan
- A toy maker
- An electric utility
- A shipping company
...making this pipeline company a reasonable fit. There is some overlap with the electric utility as both are dependent on the continued use of natural gas, but the Kinder Morgan case is compelling enough for me to let it in the portfolio.
What are the risks?
There's significant political risk involved in running a pipeline company -- if Uncle Sam decides to treat Kinder Morgan's expansion projects like it did the Keystone pipeline, those plans can get derailed. Additionally, pipelines do occasionally burst, and Kinder Morgan is no stranger to that problem. Injuries, deaths, and fuel shortages do not make for happy headlines and are a constant risk in the business.
Still, as the largest player in the industry, Kinder Morgan has the resources to respond and recover from most of those problems, though the immediate aftereffects may be less than pleasant.
What comes next?
When the Fool's disclosure policy allows, I plan to buy KMI stock for the Inflation-Protected Income Growth portfolio, as long as its share price remains below $36. I expect to invest around $1,500 in the selection, giving it a 5% allocation in the portfolio, with 50% of the portfolio still remaining cash. Watch my article feed for details of the next pick, coming soon.
Chuck Saletta owns shares of Kinder Morgan Management. The Motley Fool owns shares of Kinder Morgan. Motley Fool newsletter services recommend El Paso Pipeline Partners and Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.