I'm interested in picking up some shares of this company based upon needing another dividend payer in my selection of stocks. HOWEVER, I go over to the recent CASH FLOW report and it shows annual data ending Dec 2010 of Net Earnings of $1,316,300 and a total dividend payment of $1,826,600. Since it appears that for the past 3 years KMP has payed out more in dividends than its Net Income, probably forcing the company to borrow . . . how safe is this dividend? And more importantly, the price of the stock? Did I answer my own question? Or am I missing something?
absolutely true; KMR does pay in shares.
But that adds another risk; market price change by the time you get it.
Example: on x-div day (7/28), KMP investors were credited $1.15 per unit, which they will collect in full on the payment date (8/12).
On the same x-div date, KMR investors got $1.15 in new shares. But the # of shares were calculated at the 10 day average KMR price before x-div date. This quarter that average price was $64.26 (hence they get 0.017895 new shares per 1 share owned). In a normal quarter (normal never exists of course) you would expect both the KMP and KMR price to drop by about $1.15 on x-div date to reflect missing the distribution/dividend. But if that $1.15 drop occurred (and no other price change happened after that) the KMR investor would only end up new KMR shares worth only $1.13 on the day they got it (same number of new shares * a lower price).
However, this quarter between the x-div date and today the market has tumbled hard, down 6.5% since the close on 7/27 (and that's including this mornings rise of +115 points). KMR has done worse: down 7.7%.
If today was payment day (which it is not), the KMP investor would receive $1.15 per unit owned. The KMR's dividend of 0.017895 new shares per unit owned would be worth $1.037. The KMR price fall has hurt them. Instead of getting $1.15 in cash per unit that KMP investors got, or shares valued at $1.13 if the KMR price only went down by the amount of the KMP distribution, they end up with only $1.037 worth of new shares this quarter. That extra dime is due to bad timing...if you are a KMR investor don't you wish the x-div day was today?
What will the KMR price be on August 12, when KMP and KMR investors actually get their distribution/dividend? Who knows. Anyone expect the KMR price to be back at $64.26?
If the long term KMP investor is reinvesting, they will be able to buy new KMP units at the lower price...an example of the upside of dollar cost averaging where your new $$ buys more units when the price is lower. The KMR investor already effectively "automatically reinvested" their $1.15 at the 10 day average price before x-div day.
Look at the dividend growth the last 15 years (I've owned KMP for 8 years). The important thing on MLPs and REITs is EBITDA. Income BEFORE interest, taxes, depreciation and allocations. These MLPs use HUGE depreciation allowances to lower their tax bill. In my opinion, this the best run company with the safest dividend out there. Plus, there is no tax due until you sell it. Until then, it's "return of capital" and just reduces your cost basis.
With a need to reduce our deficit, the "wise" leaders in Congress could change tax laws. Could this be the reason some of these high dividend payers are way down. I note that Suburban Propane and many others have also has tumbled. Any talk of closing loopholes and any talk of changing the tax structures makes me worry.
aaargh...my reply has dissipated into the internet void twice already.
I don't usually like giving specific recommendations, but I do think that there are excellent opportunities out there in MLP land for long term investors right now (nothing like a market haircut to put great companies on sale).
I would take a look at EPD, MWE, APL and EPB
An excellent pair of alternatives are ETP and their general partner (GP) ETE. For every 1% that ETP raises their distribution, ETE will raise theirs about 2%. Right now ETE is expected (Wells Fargo's estimate) to grow their dist. an average of 10%/year over the next 5 years, peaking in the 13-15% range in 2012/13 time frame. Especially if one is reinvesting distributions, that becomes a powerful investment story. There is no free lunch though: if an underlying MLP does well, the GP does better. But if the MLP falters, the GP gets clobbered. One can think of a GP as acting as if it is a leveraged investment on the underlying MLP.
KMR was designed to be held by investments like mutual funds; IRAs fall into the same legal category.
There is one possible problem with owning most MLPs in an IRA, an obscure part of the tax code known as Unrelated Business Taxable Income (UBTI). All MLPs can report on your K-1 at the end of the year the amount of UBTI they allocated you that year. If your total UBTI in your IRA account exceeds $1000 your IRA (not you) must pay UBI tax on the amount over $1,000. UBTI (Line 20V on your K-1) is only relevant inside an IRA (or 401k, Coverdell or similar type account).
Most MLPs start out reporting negative UBTI, but over time the UBTI will increase and eventually become positive (unless you reinvest distributions, in which case it will probably never get to $0).
HOWEVER KMP IS DIFFERENT.
KMP is an extremely tax efficient MLP. For at least the past decade KMP has never reported any UBTI to any investor (except perhaps to traders who own for very short periods of time...weird things can end up on their K-1s).
So with no real chance of UBTI, the choice between KMP and KMR for an IRA comes down to expected total return. I go into this over at InvestorVillage. See my post on the KMR board for the link:
Click the link...don't copy-and-paste or you will loose most of the link info
this is a good question, but it also appears you need to do some basic reading about KMP. KMP is a Master Limited Partnership, not a stock corporation organized as a conventional C-Corp. This is not a mere semantic distinction, but a very real difference that you need to understand to be able to evaluate KMP.
I highly recommend reading "Wells Fargo MLP Primer, 4th Edition: Everything You Wanted To Know About MLPs, But Were Afraid To Ask ". That primer is available for free at the MLP industry organizations' website
As an MLP, you need to understand;
a) the appropriate financial metrics for evaluating an MLP, which are different than those for a C-Corp
b) the difference between a dividend and a partnership distribution
c) the tax reporting burden, and the tax implications of the considerable tax advantages offered by an MLP. Their distributions have a large tax shield (a tax postponement feature, not a tax avoidance feature), but you need to understand why the MLP tax shield is not a free lunch.
d) the critical role that growing the partnership and increasing the distribution plays in the entire investment proposition of an MLP.
As for your core question "is the distribution safe", you have to consider...in comparison to what? With US government debt under a real threat of being downgraded (or even defaulted on if the collected body of our elected leaders in Washington insist on going stupidly crazy), the concept of "safe" is changing.
IMHO the KMP distribution is about as safe as anything in the private sector investment world. A long time horizon makes that a nuanced statement though. With about half the members of the 30 members of the Dow Jones Industrial Index from 50 years ago no longer in business, and only 1 on the original list a century ago still in business today, long term safety of any invested must be grounded in realistic expectations.
What I do NOT consider safe is the rate of future increases of KMP's distribution. KMP has a stellar record of increasing distribution amount nearly every quarter for the first 15 or so years of their existence. However they failed to increase for a period after the 2008 market meltdown, and the rate is much slower now then it once was. Their forecast rate of increasing distributions (known as the forecase Compound Annual Growth Rate, or CAGR) is lower than some other energy transportation-related MLPs. I am personally doubtful that KMP's rate of increase will be as high as some other of the major energy transportation MLPs in the next 5 to 10 years. The question is whether the risk tradeoffs cooked into both the MLP price and the other MLP's prices now adequately reflect the risk of slower growth.
My family owns both KMP and KMR, and we are not actively considering selling at this time. However KMP has moved from my "no brainer, don't even think about selling it" list to more of a waitfull watching position. This is especially true for the KMR held in my IRA; I will face zero tax consequence of selling that holding. That lowers my threshold of determining whether to sell. If I conclude there are significantly better risk adjusted total returns elsewhere I will carefully evaluate continuing to own as much KMR as I do now. For my 95 year old father's almost decade old KMP investment in a taxable account, I can confidently say it is extremely unlikely he will sell anytime in the next decade or two because of the tax consequences of such a sale. What his eventual heirs do is a totally different story.