Will Kinder Morgan Energy Partners Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Among master limited partnerships, Kinder Morgan Energy Partners is just about the best-known business out there. As part of the larger Kinder Morgan empire that operates 75,000 miles of pipelines, Kinder Morgan Energy Partners makes big distributions to its unitholders. But with energy prices having weakened this year, the MLP hasn't fared as well this year as it has in the past. Is the MLP still a good investment? Below, we'll revisit how Kinder Morgan Energy Partners does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.


Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Kinder Morgan Energy Partners.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$29.5 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

3 years

Fail

 

Free cash flow growth > 0% in at least four of past five years

3 years

Fail

Stock stability

Beta < 0.9

0.35

Pass

 

Worst loss in past five years no greater than 20%

(9.2%)

Pass

Valuation

Normalized P/E < 18

21.09

Fail

Dividends

Current yield > 2%

6.4%

Pass

 

5-year dividend growth > 10%

7.4%

Fail

 

Streak of dividend increases >= 10 years

16 years

Pass

 

Payout ratio < 75%

95%

Fail

       
 

Total score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Kinder Morgan Energy Partners last year, the company's score has remained at five points. But the unit price has dropped by around 5%, all but wiping out the distributions that investors received from the master limited partnership.

Within the Kinder Morgan family of businesses, Kinder Morgan Energy Partners owns most of the assets and generates the most cash in the group. The majority of its assets are pipelines that carry natural gas and other energy products, but the MLP also does a sizable business transporting carbon dioxide. Combine that with a small Canadian petroleum pipeline, Kinder Morgan Energy Partners has a widely diversified business and is the largest player in most midstream segments, including natural gas pipeline, gas storage, and terminal operations.

Kinder Morgan's acquisition of El Paso last year brought El Paso Pipeline Partners under the broader corporate umbrella. But the two MLPs remain separate from each other, although Kinder Morgan Energy Partners recently said it would receive pipeline assets from its corporate parent as compensation for assets it had to sell off in order to gain approval for the El Paso deal. Kinder Morgan Energy Partners isn't afraid to sell off pipelines, though, as long as the price is right. With its sale of its one-third interest in the Express-Platte pipeline to Spectra Energy , the MLP will get about $380 million, allowing it to find better growth prospects.

But everything won't be smooth sailing for Kinder Morgan Energy Partners. Enbridge is trying to push through its own rival Northern Gateway pipeline from Alberta's oil sands to the west coast of Canada. Moreover, concerns about possible tax-law changes have raised uncertainty for MLPs generally.

For retirees and other conservative investors, Kinder Morgan Energy Partners' yield is strong, and the MLP has demonstrated a commitment to unitholders, raising distributions regularly. Shares are pricey at this point, but paying up for its growth potential may make sense for some energy-hungry retirement investors. Just be sure to avoid pitfalls from holding MLPs in tax-favored IRAs and other retirement accounts, and Kinder Morgan Energy Partners will be well worth a closer look.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Learn more about the entire Kinder Morgan family of companies in our latest premium report on the midstream company. Inside, you'll learn everything you need to know to decide whether Kinder Morgan is a buy, as our top energy analyst breaks down the company's growing opportunity, as well as the risks to watch out for. To determine whether this dividend giant is right for your portfolio, simply click here now to claim your copy of this invaluable investor's resource. As an added bonus, you'll receive a full year of key updates and guidance as news develops, so don't miss out!

Add Kinder Morgan Energy Partners to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

The article Will Kinder Morgan Energy Partners Help You Retire Rich? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Kinder Morgan and Spectra Energy. Motley Fool newsletter services recommend El Paso Pipeline Partners, Kinder Morgan, and Spectra Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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