We’ve been a fan of MLP’s for years. Barron’s recently had an article emphasizing the MLP that was also mentioned as a favorite during their roundtable discussion this year. Here’s an excerpt:
Errico: A business in the midstream is a toll collector that takes products from point Point A to Point B. They have monopolistic characteristics. Planes wouldn’t fly, homes wouldn’t be heated, and businesses couldn’t run without these entities. Our biggest position, the one I’ve got the most confidence in right now, is Kinder Morgan [KMI]. It’s the general partnership that owns Kinder Morgan Energy Partners [KMP], one of the largest U.S oil and gas pipeline companies. About 95% of its revenues are fee-based. What distinguishes KMI, and any MLP general partner, is that it gets a higher percentage of income when KMP raises its distribution, much like a general partner in a hedge fund or a real-estate partnership.
People call CEO Richard Kinder an MLP pioneer.
Errico: Rich Kinder left Enron in 1996 and purchased Enron’s pipelines. I’ve owned KMP since 1997. After 15 years of listening to him on conference calls, I can say he under-promises and over-delivers. He pays himself $1 a year.
And the shares?
Errico: KMP has had a 25% annual return since 1996. Kinder just did a legendary, transformational merger, buying the general partnership of El Paso [EP]. Kinder Morgan now owns two pipelines and two general partnerships. KMI could double its distribution in the next five years. Today, you get $1.40 in distributions, or 4%, and it is a $35 stock. If you get $2.50 in distributions, that’s a $62 stock. KMI, the general partnership, is where Rich Kinder has all his money. He made my career in the 1990s. I’m not worried about whether he is going to cover the distribution.
Bollinger: We initiated a position in KMI after the El Paso announcement in October.
KMI is currently yielding 4% and is off its 52 week highs: