GusMahler over on the IV board asked a question about whether his observations about how bad KMP is clobbering KMR this year could be right. I dusted off my KMP and KMR total return spreadsheet to explore his question. Unfortunately (for KMR investors who bought on 12/31/2010) my more precise #s merely confirm that what he saw is right. Here is the analysis.
I keep an every growing spreadsheet calculating the total returns of KMP and KMR.
To estimate the total returns in 2011 YTD, I assume the following:
1) an investor purchases $10k of each of KMP and KMR at the closing price on 12/31/2010. The analysis lets them purchase exactly $10k, even though that means allowing a purchase of fractional shares. For example the KMR investor would have bought 149.5215 shares @ $66.88 = $10,000.
2) they reinvested the KMP distribution paid on 2/14/2011 at the closing price on 2/14/2011 (a brokerage would more likely purchase the next day). Again, they may purchase fractional units to reinvest every penny they got as a distribution.
3) the investor keeps the new KMR shares they got on 2/14.
I calculate the total return as of 4/6/2011.
For KMR: the total number of shares has gone up by 1.74%. However the value has only gone up 0.31%. This is because the price dropped (from $66.88 to $65.94, a drop of -1.4%), which is not quite enough to wipe out the additional shares they got...but close.
For KMP, the total number of units has gone up by 1.57%. However the price (from $70.26 to $74.00, a gain of 5.3%), so the total KMP return is 6.98%.
Another way of looking at this is on 12/31/2010 the KMR discount was 4.8% (KMR sold for 4.8% less than KMP). That KMR discount was the lowest on any single day of 2010, and is very low compared to where it was most of the 2010. The 2010 average = 11.33%. By 4/6/2011 the KMR discount was =10.9%, much closer to 2010's average. The increase in the discount was caused by the combination of KMP's price increasing and KMR's decreasing.
This is a rather vivid example of what I have long written about: purchasing KMR when the discount is very low compared with recent norms is VERY unlikely to outperform an investment in KMP made on the same day. And the initial lag can be so big it will be very difficult for the KMR investment to catch up to the KMP.
Additional observation: if the same analysis was made for an investment one month earlier (11/30/2010), the outcomes would be closer. The KMR investment would have increased by 4.8%, and the KMP investment by 6.7%. In that period the KMR discount increased from 9.17% to the 10.9% it is now. So KMR's total return still lagged KMP's as the discount grew, but not by nearly as much.
That would certainly do it, and probably in a hurry. I can't imagine what the legal and taxation issues might be, but they might find it is workable.
So would taking KMR private, which I suspect is one thing they are at least kicking around. That would be a $6.2B privatization, minus the parts that insiders or KMI already own. That is a lot of $$ to pile in one place, but R. Kinder did put a together a coalition to take KMI private once before. I am sure all those sponsors have been made very happy about how that one turned out, so some of them might be willing to listen carefully to Kinder's latest ideas.
Interesting comparison and helpfull ... BUT if you buy KMR during an event driven dip such as a secondary AND when the premium is at a high, you will come out much better with KMR.
Its really a matter of waiting for the right entry. KMR fits me better cause of tax and auto dripping.
You are right: if your timing is great and you pick a very high KMR discount day you will outperform KMP. I don't know if it matters if the high discount is "event driven" or not for the relative gain of one over the other. Such an event may increase your overall gain, but not change the relative gain/loss very much between a KMP and KMR investment.
Example: the perfect day (for KMR) in 2009 was 4/7/2009, when the KMR discount closed at 14.958% (highest of the year).
By 3/18/2011 (last time I updated my spreadsheet...all these results are total return to that date) the total return on KMR was 91.4%, and for KMP was 79.9%...a difference of 11.5%.
But your timing had to be great. Within 2 weeks both before and after 4/7, there were days the discount was right about annual average (= 12.2% in 2009). Buying on 4/17/2009 (discount = 12.17%) the total returns since then were a lot closer: 86.2% for KMR and 80.8% for KMP, a difference of "only" 5.4%.
And buying just a few week earlier, on 2/26/2009 when the KMR discount hit a several month low spot at 9.3%, KMP would have been better. KMR's total return since 2/26/09 was 85.8%, and KMP's was 86.2%...a difference of .4%
Your analysis assumes that the investor is a trader. My focus is not on how much I am worth or how much my investments have appreciated.
I am focused on the real (inflation adjusted) after-tax income I have.
I am retired and have no intention of selling any MLP's or KMR. I am not smart enough to be able to redeploy the after-tax proceeds so as to enhance my real after-tax yield. All my MLP's and KMR have unrealized appreciation well in excess of 50% of their market values. For new money KMR produces close to 15% more real after-tax income than KMP.
If I were to sell KMR I would be dealing with capital gains while KMP unit holders would have significant ordinary income.
Further, there is always the possibility that Kinder Morgan will seek to eliminate the discount on KMR.
<< Further, there is always the possibility that Kinder Morgan will seek to eliminate the discount on KMR. >>
Please explain how they may do that. It seems to me the discount is set by market forces.
No, my analysis does not assume any trading at all.
In my analysis the investor buys the exact same $$ amount of both KMP and KMR on the same day.
The KMP investor reinvests all their distribution in KMP the day they get it. The KMR investor is effectively using automatic reinvestment by keeping all KMR shares they get as a dividend.
So the total return results are an apples-to-apples look at the outcome of 2 investments with full (and perfect) reinvestment and no taxes.
My analysis sheds light on picking between KMP and KMR in the initial investment. Perhaps that can be called a timing strategy, but not a trading one.
I agree wholeheartedly with your comments about as a retiree you have no intention of selling either. My 94 year old dad is in the same situation; selling would be extremely tax inefficient. MLPs are the perfect buy-and-hold forever investment, and live on the increasing distribution cash flow during the "forever" period. Some people call this getting 'trapped' in and MLP, but I think that is an unfair way to look at it. The only trap involved is if they didn't know about it when they invested. It is a nature of the beast, and quite widely and clearly described in the MLP literature. Of course way too many investors have no clear idea of what the heck they are buying...they get a hot tip form someone and buy. I shudder each time I read a post on the Yahoo or IV board saying "hey, what's this K-1 thingy I just got from my stock? Whats up with that, dude". Sighhh.