Kinder Morgan: Insiders Backing Up the Truck

Two weeks ago, I highlighted two REITs with large insider buying, American Realty Capital Properties (ARCP) and Annaly Capital (NLY).  Today, I’m going to continue this theme with a quick discussion of MLP general partner Kinder Morgan Inc (KMI).

The “Kinder Morgan companies” refer to Kinder Morgan Energy Partner (KMP), one of the largest and most popular MLPs among income investors; Kinder Morgan Management (KMR), a sister company that pays its dividend in stock; El Paso Pipeline Partners (EPB), a more recent addition to the Kinder Morgan family; and Kinder Morgan Inc., the general partner responsible for the operations of the whole lot.  Collectively, they are worth a hefty $90 billion in market cap.

Richard Kinder started the Kinder Morgan empire with pipeline assets tossed away by Enron, and he’s not your typical CEO.  He doesn’t take a lavish salary, and he actually reimburses the company for the cost of his health insurance premiums.  His income is based on the dividends he earns through his holdings of KMI.

Oh, and about that: Kinder just spent $18 million of his own money buying shares on September 9.

And he wasn’t the only insider buying.  On the same day, another officer bought nearly $100,000 in new shares.  And in the month of August, Fayez Sarofim, a director and one of the company’s biggest shareholders, bought about $15 million in new shares.

Like most income-oriented investments, KMI got hit hard as the market became fixated on Fed tapering.  But I’ll trust the inside knowledge of the company’s directors before I trust the collective “wisdom” of an emotionally-charged market.

Action to take: Buy share of KMI and collect the 4.5% dividend.  Plan on holding for 12-18 months or for total returns of 50%-100%.  Use a 20% trailing stop as risk management.

This article first appeared on TraderPlanet.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he was long ARCP, KMI and WMB. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”

The Right Way to Buy Kinder Morgan

I’ve been a big believer in midstream master limited partnerships (MLPs) for a long time.  The U.S. domestic energy revolution has created massive new demand for pipeline infrastructure, and a lack of attractive income options elsewhere makes them doubly attractive to individual investors.

As an asset class, MLPs are off to a great start in 2013.  The JP Morgan Alerian MLP Index ETN (NYSE:$AMJ), which is a good proxy for MLPs as a whole, is already up 12% this year, not including distributions.  Not bad, given that the S&P 500 is only up 8%.

Kinder Morgan Energy Partners (NYSE:$KMP) is one of the oldest and most popular MLPs and along with Enterprise Products Partners (NYSE:$EPD) is what I would consider the bluest blue chip of the group.

But KMP is a terrible choice for most investors given that you can buy its sister security at a discount while also dealing with far less headache at tax time.

Kinder Morgan Management (NYSE:$KMR) is a hybrid security that pays its distribution in stock rather than cash. It’s also “IRA friendly” and doesn’t generate a cumbersome K-1.  It’s everything great about KMP but without the headache.

For this added convenience, you might expect to pay a premium. But at current prices, KMR trades for nearly a 5% discount to KMP.  Given your choice here, you’d be a fool to buy KMP.

There is one other option as well: Kinder Morgan Inc (NYSE:$KMI).  Kinder Morgan Inc. is the general partner that manages KMP and KMR.  It’s taxable as a corporation and pays a lower dividend at 4%.  But if you believe in the growth of the industry, it’s likely to be the most profitable of the lot. Due to the way that LP distributions are paid, the general partner can be thought of as a leveraged play on the underlying MLP.

Frankly, in an MLP bull market you can’t lose with any of these options.  But for an investment in Kinder, I would recommend something along the lines of 2/3 in KMR and 1/3 in KMI.

Disclosures: Sizemore Capital is long KMR and KMI.  This post first appeared on TraderPlanet.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.