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This Little-Known Business Is Still Throwing Off Huge Dividends

By Tom Dyson, publisher, The Palm Beach Letter
Monday, October 27, 2008

Rich Kinder was supposed to become the CEO of Enron... If he had, the company might still be around today.

In 1996, Kinder was in line to take the top job at the now-notorious energy company. But Ken Lay blocked his promotion. Furious, Kinder quit.

On his way out, he negotiated a deal to buy Enron's stake in a business called Enron Liquids Pipeline for about $40 million in cash. The deal included two natural-gas liquids pipelines, a carbon-dioxide pipeline, and a rail-to-barge coal-transfer terminal. Enron didn't care about these assets. They seemed staid and didn't fit Enron's new, dynamic energy trader image. 

A few months later, Kinder joined up with his old classmate Bill Morgan to form the company Kinder Morgan with these assets.

Kinder and Morgan set their business up as a master limited partnership. The MLP is a special corporate structure available to a handful of companies that run pipelines, storage tanks, and processing plants in America's energy network. MLPs don't have to pay corporate tax as long as they distribute all their earnings to partners. Right now, there are less than 100 MLPs trading on the stock market.

The pipeline business is one of the safest, most unglamorous industries in America. Pipeline investments are so stable, to value them, analysts usually compare them to bonds. These are not financial stocks leveraged 30-to-one with debt. These are steel tubes buried under farmland.

MLPs are usually as stable and reliable as income investments get. Problem was, billions of dollars of speculative money from hedge funds and investment banks poured into MLPs over the last few years. These firms borrowed money at 3% and invested in MLPs at 6%. Now these firms are all charging for the exit at the same time.

The Alerian MLP Index, an index of the 50 largest MLPs – blue-chip names like Kinder Morgan Energy Partners, Enterprise Products Partners, and ONEOK Energy Partners – has declined 30% in the last six weeks.

Meanwhile, business is booming in the MLP sector. This year will likely go down as the best growth year on record. In the last three weeks, eight large MLPs – including Kinder Morgan – have announced distribution increases for the third quarter of 2008.

Beachfront property is the most desirable real estate. It goes down least in the recession and rises most in the boom. Today Kinder Morgan Energy Partners is the beachfront property in the MLP sector. It is to pipelines what Microsoft and Intel are to technology or ExxonMobil and Chevron are to oil. It is the largest pipeline company in America and Canada, with an enterprise value of more than $20 billion. (Enron, of course, vanished in a cataclysmic bankruptcy.)

The secret to getting rich in the stock market is buying quality assets at panic prices. We have that opportunity right now.

As I write, Kinder Morgan is building one of the largest pipelines ever constructed in America. It has joined up with ConocoPhillips and Sempra Energy in this project. The pipeline will cost $5 billion. They call this pipeline the "Rockies Express." It will transport gas from Colorado and Wyoming to Ohio. The pipeline will be ready later this year. It covers 1,679 miles. This is the most significant pipeline project undertaken in America in 25 years. Analysts predict this project will re-plumb the continent's natural gas infrastructure.

Two weeks ago, Kinder Morgan released its third-quarter earnings report. Revenues are up 45%, and earnings are up 54% from the third-quarter 2007. Kinder Morgan has raised its dividend seven quarters in a row. It announced another raise two weeks ago... to $1.02 per quarter. The quarterly dividend was 88¢ a year ago.

Master limited partnerships are the best investments anywhere in the high-yield stock sector right now. The plunge on Wall Street has decimated this sector. Prices are so low, some MLPs are paying dividend yields of more than 20%.

I encourage you to become familiar with Kinder Morgan and the rest of the MLP sector. Safe businesses that throw off big cash flows are usually too expensive to provide a big margin of safety. The dividend yield on this sector is usually around 5%. But thanks to the upheaval roiling the stock market right now, you can get a slice of large and growing dividends.

Good investing,


Market Notes

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