This week and next, we're presenting 10 core stock ideas -- stocks our writers believe can serve as the foundation for a long-term-focused portfolio.
If you're looking for a company you can buy, hold, and perhaps never need to sell, you'll want one with a strong economic moat, to assure it has long-term staying power. You'll also want one that pays its owners well. After all, the only ways to make money off a stock are through dividends or through selling, and if you're selling, the stock is hardly a core investment.
Kinder Morgan Energy Partners
Snapshot
Company Name & Ticker |
Kinder Morgan Energy Partners (KMP) |
One sentence statement of operations |
The company owns energy pipelines and storage facilities. |
Recent Price |
$68.69 |
Market Cap |
$21.2 Billion |
P/E Ratio |
45.7 |
ROE |
19.1% |
Data from Capital IQ, a division of Standard & Poor's, and Yahoo! Finance.
The business
Kinder Morgan Energy Partners along with its conjoined twin, Kinder Morgan Management
In addition to its own pipelines, Kinder Morgan partners with others in some cases. Recently, it completed the giant REX natural gas pipeline linking Western Colorado with Eastern Ohio, where it partnered with ConocoPhilips
And if you do happen like the oil production business, Kinder Morgan also claims to be the second largest oil producer in Texas.
Why it's a core stock
Refiners like Valero
But pipeline companies like Kinder Morgan? They earn their revenues more on the quantity of oil that passes through their infrastructure, rather than its price. In addition, the business is very capital intensive due to long pipeline and expensive right of way acquisition costs. In addition, it has a huge NIMBY (Not In My Backyard!) factor attached to it. Those two factors often scare away competition, so once one pipeline sets up, it's unlikely to see many others pop up locally.
Yet what ultimately makes it such an attractive business is that once a pipeline is set up, it's a significantly cheaper way to move oil than, say, trucking it around the country.
Risks
As a company with lots of flammable and toxic liquids moving around its infrastructure, the occasional explosion or leak can have nasty consequences. While nothing from Kinder Morgan has risen quite to the level of BP's recent oil spill, there have been occasional fatalities. As an investor, you face headline risk whenever there's a disaster, and a large enough one could result in permanent loss of capital.
From a financial point of view, the company's structure as a partnership adds risk as well. As a partnership, its unit holders are personally taxed based on the company's income, rather than just on the dividends they receive. As a result, to attract investors, Kinder Morgan Energy Partners typically pays out more than it technically reports as earnings.
While its payout tends to be covered by its operating cash flows, such a high distribution level leaves the company with little to reinvest. Because of this, the company regularly taps the financial markets and dilutes its existing unit holders to get the capital it needs to expand. As long as it can successfully invest that capital at high rates of return, existing unit holders should do fine, but if it can't, those units can stumble.
Sum
If you're looking for an investment that pays you well while you own it and delivers a service that's critical to our modern life, you could do far worse than Kinder Morgan Energy Partners. As long as we need oil and natural gas, and as long as the fields that produce it are far away from major population centers that demand it, there will be a need for pipelines like the ones it owns.