A Good Bet For Income Investors

02/25/2008 12:00 am EST

Focus: COMMODITIES

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo's Insiders Plus, says one energy partnership offers good income and has shown strong interest from corporate insiders.

Today's income recommendation, for those who haven't yet filled out their position, is Kinder Morgan Energy Partners, L.P. (NYSE: KMP). As a tax-advantaged limited partnership, it is not taxed at the corporate level. Your share of the profits is considered your personal income. You can buy it in tax-deferred accounts, like IRAs. But you should consult your tax advisor to learn all the implications for you.

Kinder Morgan is a pipeline company. It stores and transports petroleum products. It's a very steady business, and has a good degree of insulation from short-term price swings in the commodities it moves. Still, over time, as energy prices rise, the rates that pipeline companies charge tend to rise too. That's why this group has done so very well.

Insiders were pretty active at KMP last summer, buying more than 54,000 shares. Those numbers were even more impressive in that they were buying into strength. The stock is still strong today. Investors correctly anticipate higher profits as the Rockies Express pipeline is opened this year. That will make gas from the Rocky Mountain region available to the rest of the country.

To be strictly accurate, the insiders didn't buy these units, but rather their sister units, which pay their dividends in more units rather than in cash. The distribution grows faster in the non-cash units. You can buy them if you'd prefer. Their symbol is: KMR. Insiders hold nearly 13% of those, and a little less than 5% for the cash-paying ones. Personally, I prefer the cash each quarter. Their yield is 6.3% at the current price.

I should point out that KMP's debt/equity ratio is high, even for this type of entity. Cash flow is so steady in this business that it is much safer to take on debt than it is in most businesses. Moreover, by buying assets with debt, you increase the return for the owners, as long as the return on invested capital exceeds the cost of capital. That is not a high bar in the current environment.

Assuming the company exercises good judgment in this regard, there shouldn't be any problems. Since they own a good deal of the company, it's a safe bet they won't go overboard. The Rockies Express extensions will boost cash flow nicely.

I've raised the buy range on KMP, and, in fact, I bought more myself. Kinder Morgan Energy Partners is a buy up to $60. (It closed above $59 Friday-Editor.)

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