We'll also buy 500 shares of Kinder Morgan (KMI:NYSE) at
$41.39. In energy, we like to own stocks that either have an
ongoing internal restructuring, a commitment to a high
payout ratio (and a growing divided yield), or management
that is committed to creating shareholder value. KMI is all
three. We like the recent move to simplify its corporate
structure, going from a master limited partnership to a C
corporation, which will lower its cost structure and enable
the company to complete acquisitions for further growth. It
also has an attractive 4.2% dividend yield and an attractive
So much more detail
Jim Cramer, Stephanie Link, and TheStreet Research Team
KMI is a perfect holding in a ROTH; I love the tax free dividends (that I have been reinvesting)! I've been long KMI for a few years and added a small amount earlier this year during the college hockey player turned analyst turmoil.
KMI was set up as the general partner, with interests in
Kinder Morgan Energy Partners LP (KMP:NYSE), El Paso
Pipeline Partners LP (EPB:NYSE) and interests in several
legacy El Paso pipeline and storage assets. It was one of
the largest general partners in the MLP space with a very
diverse set of assets across the energy midstream spectrum.
Following last Sunday night's acquisition of all of its
equity interests, the company's structure and growth story
has changed significantly, and for the better. Because of
this transaction we want to be involved in the name as it
has transformed itself into a simpler C Corp structure,
which will produce higher dividends, see lower costs, do
more M&A, and create the world's third-largest energy
company behind Exxon Mobil (XOM:NYSE) and Chevron (CVX:NYSE).
The deal announced last week was the acquisition of all the
outstanding equity interests of KMP: Kinder Morgan
Management and El Paso Pipeline Partners, which will
consolidate the midstream assets into one entity. KMI will
issue $40 billion in equity and pay $4 billion in cash. The
deal will close in 4Q 2014. In essence, it will remain an
MLP under a C Corp structure, so it will continue to pay out
the majority of its cash flow in the form of a dividend and
then finance growth capital with outside debt and equity.
We like the deal for several reasons: It simplifies the
company structure, reduces the cost of capital by half,
positions the company to raise the dividend annually by 10%,
gives it size/scale advantages and capability to be an
aggressive consolidator in the industry, and most important,
investors can focus solely on the strong underlying
fundamentals rather than the distractions of various moving
pieces, which should afford it a higher valuation multiple.
Also, as a C Corp the company opens up its potential
investor base compared to its general-partner peers.
The new entity will remove the incentive distribution
structure that has prevented the company from paying out a
higher distribution and it raises the fair value estimates
substantially. It creates an energy midstream giant with an
enterprise value of $140 billion that generates $8 billion
in earnings before interest taxes depreciation and
amortization annually and nearly doubles the cash available
dividends to $7.3 billion in 2020 from $4.7 billion in 2015.
This translates into 10% distribution growth between 2015
and 20120. This alone is reason to own the position.