Friday, November 27, 2009

Kinder Morgan Energy Partners (KMP) Dividend Stock Analysis

Kinder Morgan Energy Partners, L.P. owns and manages energy transportation and storage assets in North America. Kinder Morgan is a dividend achiever as well as a component of the S&P 500 index. It has increased distributions for the past 13 years. For the past decade this dividend growth stock has delivered annualized total returns of 17.40 % to its shareholders.

At the same time company has managed to deliver an 14.20% average annual increase in its cash flow per unit since 1999.

The returns on assets have been very stable between 7% and 8% with the exception of 2007.

Annual distributions have increased by 12.10% on average over the past 10 years.
A 12% growth in distributions translates into the dividend payment doubling almost every six years. If we look at historical data, going as far back as 1993, we would see that Kinder Morgan has actually managed to double its dividend payment every five years on average.
The company has several projects worth $6 billion in its pipeline, which should add to incremental distributable cash flow per unit over the next few years.

Over the past decade the distribution payout ratio has been rather stable between 50% and 60%. For this company I used the ratio of current cash flow/unit to the annual distribution/unit. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The main risks for Kinder Morgan include increase in interest rates, which would increase the company’s borrowing costs to finance future projects and make its units less attractive to investors seeking its fat yield. Another risk could include adverse change in the legal structure of master limited partnerships, similar to what has happened to Canadian Royalty trusts. Thus investors should be careful not to have an overweight exposure to Kinder Morgan and Master Limited Partnerships in their portfolios. In addition to that as a mature MLP, the company distributes 50% of incremental cash flows to the general partner, which is higher in comparison to other pipeline operators.

Overall I think that Kinder Morgan is an attractive option for investors seeking current income as well as for those seeking future distribution growth as well. The company currently yields 7.50% and recently announced that it expects to raise its annual distributions to $4.40/unit from this year’s $4.20/unit. The company does have enough distributable cash flow to cover its distributions, in addition to having a stable toll booth type income streams from its pipeline operations.

There is an easy way to invest in Kinder Morgan (KMP) if you do not want to worry about K-1 tax forms. If you choose KMR they would pay their distributions directly as additional shares, which is similar to automatic dividend reinvestment. If you choose to invest in KMP in an IRA, consider investing in KMR . KMR is a great vehicle for taxable accounts as well since their distributions are not taxable when received, and thus shareholders are not issued an annual 1099 tax form. You would pay taxes only when you sell your units.

Full Disclosure: Long Kinder Morgan Energy

Relevant Articles:

- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
- General vs Limited Partners in MLP's
- MLPs for tax-deferred accounts
- Six Dividend Stocks for current income

This article was written by Dividend Growth Investor. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.


  1. "If you choose to invest in KMP in an IRA, consider investing in KMR."
    Just wondering if you meant to recommend using KMP, not KMR, within an IRA since there would be no tax forms to hassle with if you own KMP in an IRA.
    Excellent advice about the tax implications. As one who once made the mistake of owning shares in a limited partnership in a taxable account, I sure recommend thinking twice before buying ones that pay cash dividends in a taxable account unless you enjoy filling out umpteen obscure and complicated tax forms.

  2. Please correct me if I am wrong, but I believe the intent of recommending KMR over KMP is the potentially negative tax implications when holding shares of a partnership within an IRA, not a taxable account (which as you indicated does have its owne paperwork to contend with). However, I believe that if you receive too much in dividends within the IRA (>US$1000) from a partnership, then you may still have tax liability and paperwork to contend with. By holding KMR, you should avoid such issues.


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