I update my spreadsheets about every 6 months or so. I last did that in May of 2009, but have not up dated it since then. See my post (and the thread that follows it), starting at
There was also a brokerage report put out in May by Wells Fargo (nee Wachovia) on the subject. I posted the summary of the report at
There are some good comments in that thread also.
I agree that the current KMR discount...KMR is 11.3% less than KMP...is high by historical comparison. I am starting to wonder whether the world changed when the market collapsed though, and the "new norm" is a higher discount than the previous typical range. The discount got over 16% in December, which was really in the nutso range. Who knows...in a year or 3 we may look back and see that something like 11% +/- 2% may be the new norm.
Abter1: Can you think of any reason why the Enbridge corollaries trade just about evenly -- EEP 43.65 EEQ 43.17 at this moment. I can't. Maybe there is some fatal flaw in the KMR -- KMP etc. structure that may lead folks to fear an invasion by the IRS; a flaw that is not present in the Enbridge set-up. Any thoughts? Or,most likely, it is just reflective of the general silliness of the market.
I really don't have any good answer to why the EEQ discount is so small, and the KMR one is large.
Markets can be silly (thats an understatement !), but the EEQ and KMR discount story has been very persistent. It is hard to imagine the market is being so consistently silly.
My suspicion is that it somehow has to do with the expectations of future growth of the distributions of KMP and EEP. I say that only because I see that as the primary distinguishing feature that is so different between KMR and EEQ. But I haven't been able to think through how this difference would play out into a different discount.
The Wachovia article from May '09 on the KMR discount I referenced in an earlier post mentions the typically tiny discount for EEQ. This is the only article I have ever seen discussing the KMP/R discount at all, and Wachovia basically wrote "the EEQ discount is tiny, its weird KMR's is so large, and we don't know why".
I'm open to ideas on this arcane sub-topic in the world of MLPs and their brethren.
I just want to remind everyone what I pointed out before: the general pattern is for KMR to eventually drop more than the dividend amount after the last day pre-x-dividend, at least for some period of time. In this case, it closed at 47.84 on 7/27. Dropping $1.05 means below 46.89, where it's been for most of the time since 8/6. This says nothing about the relation with KMP, but holders of KMP got cash and not unpredictably priced new shares, so again I think that must have something to do with the premium of KMP over KMR. That said, no reason to not expect a relative spike in KMR price as you get closer to the next x-div date, which of course would lead to a smaller number of shares being distributed. I guess that goes with the general idea that the market tends to extract the most amount of pain from the maximum number of investors.
This most recent dividend & distribution payment gives an interesting perspective.
Fact: KMP paid $1.05, and KMR paid 0.022146 shares/share owned.
If your broker was efficient in processing paperwork, you got your KMR dividend share on the payment date (8/14). If you then sold your 0.022146 shares at the closing KMR price on 8/14, you got $1.0244. [Selling at the close on any the next 5 days could have gotten you anywhere from $1.018 to $1.029...not a huge swing.]
So KMP owners put more $$ into their pocket per unit owned then KMR owners did (per share owned). No surprise here.
But that's not the whole story...KMR sells for less than KMP. Lets look at what happened to $10,000 invested in KMP and another $10k in KMR on 7/28/09 (last day to purchase get the dividend or distribution).
$10k on 7/28 would have bought 185.185 units of KMP, or 209.03 shares of KMR.
On the payment date (8/14), the KMP investor would get $194.44 in cash, and the KMR owner could have sold their new shares for $214.14. So the KMR owner has more cash (~$20)in their pocket.
The more complicated thing is that both KMP and KMR went down between 7/28 and 8/14, and they each went down by more than the amount of the dist. or div. KMP was down $1.25 from 7/28 (a 2.31% loss), and KMR was down $1.58 (a 3.3% loss).
So here is where the 2 $10k investors stood on 8/14:
KMP owner had $9,769 in units + $194 in cash = $9,963 total
KMR owner had $9,670 in shares + $214 in cash = $9,884 total
On net then, the KMP owner was ahead by $79.
As I said, this is all just looking at one payment cycle, and just looking at it from 7/28 to 8/14.
What about over the longer term? Longer meaning ~ 5 quarters (I will calculate since 6/30/08 to 9/9/09) Remember though: this was a weird year. Not only for the market as a whole, but for the KMP - KMR relationship especially. On 6/30/2008 KMR was selling at a discount of 3.3% to KMP. Today KMR is 12.5% lower than KMP. That is a big drop, that a higher yield can't make up.
Say our 2 investors bought $10k of each on 6/30/2008. The KMP investor kept the cash they got, and the KMR investor immediately sold the shares when they got them, and kept the cash. How have they done up to today?
On 6/30/08 $10k would have bought 179.43 units of KMP, or 185.7 shares of KMR.
Since then the KMP investor has received $925.89 in cash distributions. Our get-and-sell KMR investor has received $943.82 from selling. So the higher yield of KMR has put more cash ($18 more)in his pocket.
But the steep increase in the KMR discount has hurt the KMR investor badly. On 6/30/08 KMR was selling for a 3.3% discount...now it is at 12.5%. The original KMP investment is now worth $9,537, down 4.6%. The original KMR investment is now worth $8,635, down 13.6%. As I said, the increasing discount has hurt! Add back in the cash they got, and the KMP investment has a total worth of $10,463, and the KMR investment has a total worth of $9,579.
Putting a little perspective on this: the S&P500 is down 18.4% since 6/30/08, so either KM* investment has beaten the market by a good bit. But +4.6% total (cash + units) for KMP, and -4.3% for KMR over that period is still a pretty big difference.
Of course if the KMR discount drops below where it is today the 2008 $10k investment picture will change. But I am starting to believe somehow the "new normal" KMR discount may be bigger than the "old normal". The discount would have to drop all the way to about 4% before the 2008 KMR investor catches up to the 2008 KMP investor. I doubt if we will see a new normal of anywhere near 4% discount.
All this is merely backward gazing. Our future mileage may vary (to say the least!) I apologize for "thinking out loud" with everybody here as I mulled this over.
Please, don't appologize and don't stop thinking out load. Your analysis is very interesting and thought provoking.
Since my holdings are in an IRA, (that's where I've got money to invest) I'm not selling my additional KMR shares. How would the "compounding" of the additional units play out in your longer term (5+ Q) scenarios?
[warning folks...Abter is playing with his spreadsheets again...run, hide !]
You are getting at the key bottom line question: which has been better, KMP or KMR?
I ran an analysis as follows:
1) Purchase $10,000 worth of KMP and KMR at closing price on 1/3/206 (first trading day of 2006)
2) Hold onto all KMR dividend shares
3) For KMP, take distribution $$ when received and purchase more KMP units at close of payment date (no transaction costs).
4) analysis all through 9/11/09 (this past Friday).
The results surprised me.
KMR: you now have 32.8% more shares then you have started with
KMP: you now have 30.5% more units than you started with.
So...the higher yield every time is working...your KMR # of shares has grown faster than the KMP # of shares.
BUT (you knew this was coming)...
Which investment has higher value?
Up through September 2008 KMR was doing better the majority of the time. It hit an all-time peak on 12/17/2007 when the KMR investment was 7% ahead of the KMP investment ($13,125 for KMR, $12,258 for KMP).
At the end of September '08 KMR was still looking good (+4.1% over the KMP investment).
But as the overall market hit the wall in October, the "KMR discount" started to soar. KMP was getting hit hard, but KMR was hit worse. At a sharp trough on 12/10/2008 the KMR investment was 10.5% behind KMP. Both were still up from the purchase date, but KMP was at $12,375 and KMR at $11,082.
Things got worse for both investments, hitting a low for this pair of investments on 3/9/2009. The KMR investment was under water ($9,900), and KMP was at $10,585. So KMR was then "only" 6.7% behind KMP.
Since then both KMP and KMR have rebounded nicely. on 9/11/09 the KMP investment was worth $14,435, and the KMR investment was worth $13,525. So over this particular analysis period (Jan 06 to Sep 09) the KMR investor is 6.3% behind the KMP investor.
It is worth noting that both have done relatively well through these very troubled times. The KMP investor has a total return of 9.95%/year, and the KMR investor has a total return of 8.18%/year. The S&P 500 was down 5.3%/year over that period.
Bottom line: the rapid increase in the KMR discount in October 2008 has had a serious impact on the outcome for the KMR investor, and pretty much determines the outcome of the KMP vrs. KMR analysis.
Right now KMR's price is 13.5% less than KMPs. KMR's price would have to climb to $49.66 for these two investors to be equal. $49.66 would be a KMR discount of 8.3% (KMP's price was $53.8 on Friday). An 8.3% discount is well within the historical normal discount range, but a smaller discount than we have seen since December '08.