Showing posts with label analysis. Show all posts
Showing posts with label analysis. Show all posts

Monday, April 22, 2013

Kinder Morgan Rewards Both General and Limited Partners with Higher Income

Kinder Morgan is the largest midstream company in North America, with over 73,000 miles of pipelines and 180 terminals. The pipelines transport oil, natural gas, CO2 and other products. The terminals handle a variety of products such as gasoline, jet fuel, ethanol, coal, coke, steal and others.

As I outlined in an earlier article, there are three ways to invest in Kinder Morgan. The first and second way to invest are through purchasing the limited partnership units. With Kinder Morgan Partners (KMP), unitholders can earn distributions in cash, while for Kinder Morgan Management LLC (KMR), limited partners directly obtain i-units, instead of cash. Since there is no taxable event for holders of KMR, the i-units are a great tax efficient way to build a position in the partnership even in a taxable account. Before the IPO of Kinder Morgan Inc in 2011, my entire position in the partnership was in i-units. For example, if Kinder Morgan Partners (KMP) paid $1.30/unit in a given quarter, holders of Kinder Morgan Management LLC (KMR) would have received a partial share worth $1.30. If the price for KMR was $100, the KMR unitholder would have received 0.013 units.

Last, there are the general partnership interests in Kinder Morgan Partners, where Kinder Morgan Inc (KMI) is the vehicle to purchase. Kinder Morgan Inc also owns the general partner interest in El Paso Pipeline Partners (EPB). In addition, KMI also owns limited partnership interests in Kinder Morgan Partners, El Paso Pipeline Partners and Kinder Morgan Management LLC. I recently added to my position in Kinder Morgan Inc in my IRA.

Over the past week, Kinder Morgan approved distribution hikes for both the general and limited partners.
The limited partners of Kinder Morgan Partners (KMP) also received a distributions boost to $1.30/unit. This represented an 8% increase over the distribution paid in the corresponding quarter in 2012. This brings the current yield up to 5.70%. The partnership is projecting an increase in annual distributions to $5.28 for 2013. Since KMP is a master limited partnership, distributions are not eligible for preferential qualified dividend tax treatment. Because partnerships are pass-through entities whose income is taxed at the limited partner level and not the entity level, distributions from MLPs are slightly more complex to handle from a tax perspective. This is a big reason why many investors avoid them outright. Check my analysis of Kinder Morgan Partners.

The distributions to Kinder Morgan Management LLC (KMR) will be paid in additional KMR shares. I hold the i-shares because I am in the accumulation phase and it is an option to have less complicated and time-consuming tax returns. The i-shares usually trade at a discount to the limited partnership interests, which is why it is usually a better deal for long-term holders.

Kinder Morgan Inc (KMI) shareholders will receive a higher quarterly dividend by 2.70% to 38 cents/share. This was an increase of 19% over the distribution paid in the same quarter in 2012. This brings the current yield up to 3.90%. The company is projecting an increase in annual dividends to $1.57 for 2013. Since KMI is a corporation, the dividends are eligible for preferential qualified dividend tax treatment.

The partnership is able to grow distributions from new additions to its vast portfolio of fee-generating assets. I would strongly encourage investors to read through the press release. According to it, distributions are well covered in Q1, as DCF/unit was $1.46, for a DCF payout ratio of 89%. The partnership is a great vehicle for investors who are looking for high current income, with solid distributions growth. The K-1 forms make this investment slightly more challenging, although it leads to substantial tax deferral of distributions received for over a decade.

Kinder Morgan Inc is able to grow dividends faster, because of its incentive distribution rights (IDR). These IDR’s entitle the general partner to half of any incremental distributable cash flow above certain thresholds. This stock is perfect for investors who want high yields today, plus the possibility of high dividend growth. The stock is also perfect for investors who do not want to deal with the more complicated tax return that Kinder Morgan Partners would create.

Full Disclosure: Long KMI and KMR

Relevant Articles:

Kinder Morgan Partners (KMP) for High Yield and Solid Distributions Growth
Kinder Morgan Partners – One Company three ways to invest in it
General vs Limited Partners in MLP's
Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
Six Dividend Paying Stocks I Purchased for my IRA

Friday, October 7, 2011

Diebold (DBD) Dividend Stock Analysis

Diebold, Incorporated (DBD) provides integrated self-service delivery and security systems and services primarily to the financial, commercial, government, and retail markets worldwide. Diebold is a dividend champion which has paid uninterrupted dividends on its common stock since 1954 and increased payments to common shareholders every year for 58 years. There are only ten companies which have raised dividends for over half a century. Diebold is the only company in the world which has managed to raise dividends for 58 years in a row.

The most recent dividend increase was in February 2011, when the Board of Directors approved a 3.70% increase in the quarterly dividend to 28 cents/share. Diebold’s largest competitors include NCR Corp (NCR), AVID Technology (AVID) and Stratasys (SSYS).


Over the past decade this dividend growth stock has delivered an annualized total return of 0% to its shareholders. Just like most other stocks, Diebold was overvalued at the beginning of the decade, which led to poor total returns.

Analysts expect Diebold to earn $2.08 per share in 2011 and $2.31 per share in 2012. In comparison Diebold lost $0.31 /share in 2010. The company has managed to consistently repurchase 1.30% of its common stock outstanding over the past decade through share buybacks.


The earnings pattern over the past decade has been volatile while lacking any upward trend. Even if analyst’s estimates materialize for 2011 and 2012, the company’s EPS would still be below the 2004 highs of $2.54/share. If Diebold is unable to deliver a sustainable earnings growth over the next decade, it would be unable to continue increasing distributions to its shareholders.

The markets for its Automated Teller Machines (ATM) and other self-service stations are highly competitive, while competition is based on cost, service, innovation and improved productivity for clients. The company does have the opportunity to generate orders in emerging markets like India and Russia, where penetration of ATMs is lower than in the US. The financial crisis has been challenging to Diebold, as it hit its customers pretty hard. By increasingly relying on its services division, which generates more even revenue streams, the company could smooth out its uneven revenue sources.

The company’s Returns on Equty have closely followed the deterioration of earnings over the past decade. If the company manages to increase earnings per share past $2, ROE should increase comfortably in the mid to high teen percentage. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.


The annual dividend payment has increased by 6% per year over the past decade, which is higher than the growth in EPS.

A 6% growth in distributions translates into the dividend payment doubling every twelve years. If we look at historical data, going as far back as 1961, we see that Diebold has actually managed to double its dividend every seven years on average.

The dividend payout ratio has remained below 50% in only 3 of the past ten years. Based on forward earnings for 2011 however, the payout ratio is close to 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Diebold is trading at 13.90 times 2011 earnings, yields 3.90% and has a sustainable forward dividend payout. The erratic earnings picture over the past decade however makes this stock a hold. If the company's management doesn't manage to increase earnings over the next decade, the company's streak of consecutive dividend increases will have to come to an end.

Full Disclosure: None

Relevant Articles:

Monday, September 12, 2011

My Bullish Case: Stocks are cheap

The past month has been marked with volatility and steep sell-off in stocks on a global scale. The unprecedented downgrade of US government debt from S&P, the high unemployment and the slowdown in the US economy all caused investors to be bearish on equities. As stocks keep on falling however, companies keep on generating positive earnings surprises. Despite all the bearish news, i believe that now is the perfect time to start accumulating stocks.


In an environment where everyone is inflating the gold bubble and the US Treasury bubble, stocks are being overlooked by investors. The “lost decade” has burned many US investors, who saw stagnating stock prices since the early 2000s. That being said, stock prices could go lower, thus making stocks an even better investment at lower valuations for smart long term investors.

For the 4 quarters ending June 30, 2011, S&P 500 index, which is my benchmark, has “earned” $83.87. The dividends paid to S&P 500 investors amounted to $24.34, while operating earnings amounted to $90.90. Based on the current S&P 500 price of $1154, the index is trading at a P/E ratio of 13.76 and yields 2.10%. Source S&P.

The average P/E ratio has been 20.80 times earnings since 1977. Based on that information, stocks are at their cheapest valuations in years. In addition, since 1871, P/E ratios on S&P 500 have averaged 15 times earnings.

Analysts are estimating that S&P 500 companies will generate operating earnings of $98 in 2011, followed by an increase in operating earnings to $112 in 2012. It looks as if investors are discounting that these increases will be much lower. However, even if earnings stagnate for several years, companies will generate a sufficient amount of earnings in 14 years which is equal to today’s S&P 500 prices.

Investors should not overlook the fact that most of the stocks with the highest weightings in the S&P 500 are global multinationals, which generate a high amount of their revenues and earnings from international operations. In a previous study I found out that international operations account for almost half of revenues for the top 10 companies in the S&P 500.

The types of companies that I am looking to invest in are blue chip dividend growth stocks, which have long histories of increasing dividends. The types of dividend stocks I am looking to buy on any further weakness include:

PepsiCo, Inc. (PEP) engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. This dividend aristocrat has managed to hike dividends for 39 years in a row. The company has increased dividends at an annual rate of 13% over the past decade. Analysts are expecting earnings growth of 13.80% in 2011 and 9% in 2012. Yield: 3.30% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. This dividend champion has raised dividends for 48 years in a row. The company has increased dividends at an annual rate of 12.40% over the past decade. Analysts expect the company to grow EPS by 17.60% in 2011 and 9.90% in 2012. Yield: 2.50% (analysis)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. This dividend aristocrat has raised dividends for 39 years in a row. The company has increased dividends at an annual rate of 8.80% over the past decade. Analysts expect the company to grow EPS by 56.70% in 2011 and 7.50% in 2012. Yield: 3.70% (analysis)

Unilever PLC (UL) provides fast-moving consumer goods in Asia, Africa, Europe, and the Americas. This international dividend achiever has raised dividends for over one decade. The company has increased dividends at an annual rate of 9.20% over the past decade. Analysts expect the company to grow EPS by 21.60% in 2011 and 8.50% in 2012. Yield: 3.90% (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. This dividend achiever has raised dividends for 24 years in a row. The company has increased dividends at an annual rate of 8.10% over the past decade. Analysts expect the company to grow EPS by 43.40% in 2011 and a 2% decrease in 2012. Yield: 3.10% (analysis)

These sleep well at night stocks should provide a rising dividend income stream to investors as well as the potential for capital appreciation.

Full disclosure: Long PEP, CL, ABT, UL, CVX

Relevant Articles:


Monday, June 20, 2011

Kinder Morgan Partners – One Company three ways to invest in it

Kinder Morgan Energy Partners, L.P. owns and manages energy transportation and storage assets. This master limited partnership has consistently increased distributions since 1997.

There are three ways to invest in the partnership:

The first is by purchasing the limited partner units traded on NYSE under ticker (KMP). These are limited partnership units, which generate K-1 tax forms to unitholders. Most of the distributions which investors receive on a quarterly basis represent a return of capital, which means that it is not taxable unless investors decide to sell their units or unless their cost basis drops below $0. This return of capital reduces the cost basis of investors. The lower cost basis would trigger capital gains when units are sold. When the tax basis drops below $0, any distributions are taxed as ordinary income. I have analyzed Kinder Morgan Partners (KMP) in this article.

The second is by purchasing the LLC units traded on NYSE under ticker (KMR). KMR is a limited partner in and manages and controls the business and affairs of KMP. KMR has no properties and its success is dependent upon its operation and management of KMP and KMP's resulting performance. The only asset that KMR owns is KMP shares. Investors in KMR do not receive cash distributions, but receive shares proportional to the ownership interest they have in the stock. The cash distributions for KMP and KMR are equal, the only difference is that KMR distributions are paid in the form of additional shares.

The third way in investing in Kinder Morgan is by purchasing shares in the general partner interest, which recently started trading on NYSE under ticker (KMI). KMI owns the general partner and limited partner units in KMP. KMI also owns 20 percent of and operates Natural Gas Pipeline Company of America (NGPL), which serves the high-demand Chicago market. Another valuable asset behind KMI is the Incentive distribution rights behind the general partner, which entitles it to 50% of the distributions above certain thresholds. This is why any growth in KMP distributions would really accelerate growth in KMI dividends. KMI is set up as a corporation, which is why investors should receive a form 1099- DIV at the end of the year and have their dividends taxed at no more than 15%.

I purchased the i-units of KMR since I am in the accumulation phase and since they are trading at a steep discount to KMP units. It is true that KMR shares do not offer a “cash payment” per se, although investors could sell the additional shares received each quarter and obtain cash income that way. Investors could purchase KMR and hold it in tax deferred retirement accounts such as ROTH-IRA’s for example, without worrying about the unrelated business tax income (UBTI). Although in a previous article I have discussed why I do not believe the UBTI is an issue for tax-deferred accounts, nevertheless some investors might still worry about this potential tax penalty.


I also purchased KMI as a dividend growth play. While the yield is decent at 4%, I view the company to have excellent dividend growth potential.

Full Disclosure: Long KMR and KMI

Relevant Articles:


This article was included in the Carnival of Personal Finance #315 : Bring on the Long Weekends

Friday, November 12, 2010

Eaton Vance (EV) Dividend Stock Analysis

Eaton Vance Corp. (EV) , through its subsidiaries, engages in the creation, marketing, and management of investment funds in the United States. This dividend champion has increased distributions for the past 30 consecutive years. The latest dividend increase was in October 2010, when the company raised distributions by 12.50% to 18 cents/share.

Over the past decade this dividend growth stock has delivered annualized total returns of 10.80 % to its shareholders.

The company has managed to deliver a 3.50% average annual increase in its EPS between 2000 and 2009. Analysts expect Eaton Vance to earn $1.39 per share in 2010 and $1.76/share in 2011.

Overall I am bullish on asset managers in the long run, and Eaton Vance fits by default. As we have millions of baby boomers retiring and needing financial advice, I expect them to use financial advice from certified planners, which would pre-sell open and closed-end funds and other financial products. Once a product has been sold to investors, it creates a recurring income stream to the provider of funds. The revenues that investment managers generate are realizable in cash almost instantaneously, which is a big plus. New product offerings could also contribute to growth, although at $173 billion in asset under management, it won’t be the main source of revenues for Eaton Vance. Acquisitions to obtain companies that target high-net worth individuals could be a big driver for future growth, as would be expansion internationally. Another positive is that as US stock prices keep increasing, this would eventually attract more investors to add in more money, which would create even higher profits for companies like Eaton Vance. Overtime I expect Eaton Vance to get an even larger pile of assets under management due to all of the above mentioned reasons, which would lead to earnings and dividend growth.

One of the largest risks for Eaton Vance includes competition, which could result in net outflows for assets under management as well as decrease in fees charged to clients. Another risk includes prolonged declines in equity markets, which could turn investors off stock market investing. Most notably that hasn’t been the case for Eaton Vance during the “lost decade”, as assets under management grew from $49.20 billion at the end of 2000 to $173.30 billion as of July 31, 2010.

The company generates very high return on equity, whose trend has closely followed the rise and fall in equity markets over the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The company has managed to raise its annual dividend at a rate of of 22.50% annually since 2000, which is much higher than the growth in EPS. The main reason is the increase in the dividend payout ratio over the past decade. I would reasonably expect Eaton Vance to manage to raise distributions by at least 10% per year for the next few years. The latest dividend increase was in October 2010, when the company raised distributions by 12.50% to 18 cents/share.

A 22 % growth in dividends translates into the dividend payment doubling every three years. If we look at historical data, going as far back as 1990, Eaton Vance has actually managed to double its dividend payment every four years on average. The company last raised its dividends in 2010 by 12.50%.

The dividend payout ratio has increased over the past decade, breaking out above 50% in 2009. Given the expected earnings of $1.40 in 2010 and the new annual dividend rate of $0.72/share, I would expect the payout to drop to 50% and to decrease further by 2011. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Eaton Vance is overvalued at 21.20 times earnings, has an adequately covered distribution and yields only 2.40%. Competitor State Street (STT) trades at a P/E of 11.50 and yields 0.10%, while Blackrock (BLK) trades at a P/E of 8.30 and yields 2.40%. Ben Franklin Resources (BEN), which like Eaton Vance (EV) has a long history of uninterrupted dividend increases trades at a P/E of 18.40 and yields a paltry 0.80%.
Eaton Vance would be more attractively priced below $28. I would continue to monitor this company for dips below $28.

Full Disclosure: None

Relevant Articles:

- Why dividend investing beats US Treasuries today?
- Dividend investing timeframes- what's your holding period?
- How to make money in dividend stocks despite Wall Street
- Six companies with 20% yields on cost

Popular Posts