A Kinder, Gentler Investment Opportunity
Companies / Investing 2009 Jan 28, 2009 - 10:48 AM GMTBy: Oxbury_Research
Before we get into the meat of it and introduce you to a very compelling income opportunity, a few brief words on the overall market situation as it appears today. It will be important to bear these items in mind as the calamitous cacophony of media Chicken Littles sings its “sky is falling” reprise.
Take it to heart that:
- Stock prices turn before the economy does. The last time a consumer-induced recession hit in 1990, the S&P 500 had rallied more than 25% from its lows in October of that year before the economy began to turn in March of 1991. So, too, back in 1982, when the market rose a killer 35% before the recession ended in November of the same year. The next bull market in stocks is taking shape now and may be upon us in just a couple of months, if not sooner. There should be lots of jigs and jags (and plenty of “THE SKY IS FALLINGs”) between now and then.
Every major economy on earth is now actively engaged in auto-stimulation. Get your head out of the gutter, man; we're referring to economic stimulus. And it appears to be gaining some traction – not to mention confidence. Interest rates are falling, works projects are being budgeted and capital injections aplenty are mainlining their way into the arms of junkie financial firms the world over. It will take a while before the funds actually accomplish much, but confidence – confidence is everything. - Mutual and hedge fund redemptions played no small role in the sell off of September/October last year, and thankfully that selling is all but over . We wrote extensively about it at the time. Cash positions are now as large as they've ever been and all that's required is someone brave enough to fire the starter's gun (see Oxbury's Charts of the Week: Financial Theater , for more on this point).
- Stock valuations are perfectly sane (for this particular point in this insane world's time). We are in a recession – a heavy-duty one, to be sure. But stocks are priced for a depression, and there are plenty of good names with cash rich balance sheets and safe dividends in good shape to weather the downturn. Be on the lookout for them.
- As for dividends (which is why we're here), you'd be smarter to buy them than a T-Bill or CD. And you'll do better with the taxman for it, too.
That's it. Call me Pollyanna if you like, but just be sure to leave me your phone number so I can ring you up in six months and call you an ARSE for not having jumped in now when the going was still good!
Now on to something a lot kinder
The best investments are the ones that pay and pay and keep on paying. This week's spotlight investment is a company that fits that bill to a tee. Let's begin with a look at the chart.
Kinder Morgan Energy Partners ( KMP:NYSE ) is one of America 's biggest pipelines. With a market cap of $20 billion, Kinder Morgan boasts 25,000 miles of pipe and 170 storage terminals across the continent. And a look at the chart shows that this is one company that suffered very little in the “worst bear market since the great depression.”
KMP is now selling for less than 10% below its price peak before the heavy selling began in August of last year. It's trading above its 50 day moving average, and though we'd like to see a lot more positive volume underpinning the rise, we'll take it anyway. Why? Because the company pays a quarterly dividend of $1.05 per share for an annual yield of 8.25%. Moreover, Kinder Morgan has just raised the dividend (from $1.02 per share), which says a lot in this economic environment. And on top of that, this is its seventh consecutive quarterly raise in the dividend! Get down on both knees and say “Thank You Kindly!”
Ahem. KMP has a stellar record of dividend payment, having hiked the payout annually now for thirteen years running. They also have a perfect record of payment going all the way back to the company's founding in 1992. Kinder Morgan's CEO, Richard Kinder (a very kind man), recently referred to his company as: “essentially a huge toll road.” We like it, Ricky. Toll road. Money.
How does the broader energy picture affect Kinder Morgan's profits?
First, know that the current recession has destroyed energy demand worldwide in a profound way; that's why crude prices dropped from $150 a barrel to their recent lows in the mid $30's. And yet the current price situation is not sustainable. Supply factors will force prices higher , despite the drop in demand.
Sure OPEC wants higher prices per barrel, but they have never been able to keep to their sales quotas and, more significantly, they just don't represent the same force in world energy markets they did back in 1974 at the height of the oil crisis.
More significant is the sheer seizure in development spending that attended the recent drop in crude prices. It simply no longer pays to go hunt for new sources when extraction costs are higher than current spot prices. Deep-water resources in the Gulf of Mexico , for example, and offshore finds in Brazil 's Tupi field require prices of at least $60 a barrel before they become viable. And in the Canadian oilsands it's even more expensive. There, the cost of finding, developing and producing a new barrel of oil runs roughly $90 – four times more than it was a decade ago. See here:
More sensible to wait for the market to do its work, for existing supply to be purchased and the resulting shortages to force the price of oil futures back into triple digit territory.
Yet even when that transpires, you can count on big oil being slow to revamp budgets and get active. In the current financing environment we don't imagine anyone will be eager to raise cash for new exploration.
Which means higher oil and gas prices are literally “in the pipeline” for our friends at Kinder Morgan Energy Partners.
The Residual Income Report recommends immediate purchase of KMP:NYSE at $50.50.
Sweet crude. So kind.
Matt McAbby
Analyst, Oxbury Research
After graduating from Harvard University in 1989, Matt worked as a Financial Advisor at Wood Gundy Private Client Investments (now CIBC World Markets). After several successful years, he moved over to the analysis side of the business and has written extensively for some of corporate Canada's largest financial institutions.
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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