Kinder Morgan: Compelling Choice

09/12/2014 8:00 am EST


Eric Vermulm, CFA

Senior Portfolio Manager, Stack Financial Management

Although there’s no way of knowing when the market peak will occur, our focus going forward will remain on these more conservative, late stage sectors, explains Eric Vermulm of Stack Financial Management in InvesTech Market Analyst.

Energy companies tend to perform well in the latter stages of a bull market and recently announced changes at Kinder Morgan (KMI) make it an attractive opportunity in the sector.

Since 1972, energy has outperformed the S&P 500 in the last twelve months of a market expansion five out of six times (83% batting average).

Even more impressive, the sector’s median gain of 34.2% during these years bested all others and easily outpaced the S&P 500’s median gain of 18.1%.

Kinder Morgan is a compelling choice in this space as it operates the largest network of pipelines and energy infrastructure in North America. It maintains more than 80,000 miles of natural gas, petroleum, and carbon dioxide pipelines as well as 180 terminal locations.

The rapid growth in US domestic oil and natural gas production is allowing KMI to capitalize on both its existing infrastructure assets and invest in an estimated $17 billion in additional growth projects.

The company’s stable, fee-producing assets provide a consistent revenue stream that translates into an attractive dividend payout. With more than 80% of cash flow coming from fee-based arrangements, KMI has the dependability to fund a current yield of 4.2%.

While the yield has come down recently as the stock has risen, management has indicated that the dividend should increase to $2.00 per share in 2015, which would equate to a near 5.0% yield at current price. Beyond 2015, company executives forecast a 10% annual dividend growth rate for the next five years.

Kinder Morgan recently announced that it will be changing its corporate structure to more clearly align shareholder interests. KMI is purchasing all of the outstanding shares of its subsidiary Master Limited Partnerships.

While there are numerous reasons for the transaction—including reduced taxes, lower cost of capital, better acquisition prospects, and enhanced dividend growth—the most compelling may be management’s continued focus on driving shareholder returns.

With CEO Richard Kinder (who owns 29% of outstanding shares personally and pays himself just $1 a year in salary) fully backing the plan, we think the prospects for the new KMI and its growing dividend are compelling.

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