2 Strong Dividend Names For a Volatile Environment
Research Director, Mad Money
From: James Cramer
Sent: Monday, December 19, 2011 2:20 PM
To: Nicole Urken
How about a list of stocks that have hit all-time highs (I notice Petsmart just did). Great list for us….
From: Nicole Urken
Sent: Monday, December 19, 2011 3:35 PM
To: James Cramer
Subject: RE: List
List is attached. Interestingly, both of the pipeline names we are highlighting today are on the list—KMP and PAA
As discussed in "Mad Money’s" market piece on Monday, this has been a market that prizes the likes of Bristol Myers, Merck, Pfizer , Con Ed , and Dominion Resources . Today, lack of negative European news has allowed the markets to soar—driven by the United States which has seen strong trends. But that doesn’t mean we are in the clear completely, and that is why a diversified portfolio is paramount.
And when it comes to yield with consistent returns, look no further than the Master Limited Partnerships, or MLPs. The pipeline names in particular remain a key way to have some energy weighting in your portfolio while balancing your risk. Why? Because the majority of them act like toll road operators—ultimately, they benefit from more volume demands (to transport oil & gas) and need for infrastructure, but have little to no commodity or execution risk. Additionally, MLPs pays no corporate taxes and pass almost all of their earnings along to shareholders in the form of a distribution, which is similar to a dividend, except that the tax treatment tends to be even more favorable.
On Monday’s "Mad Money" show, we answered the question of which name had more upside: Plains All American Pipeline or Kinder Morgan Energy Partners. Ultimately, based on the comparative analysis we laid out, PAA has more near-term upside while KMP continues to have amongst the strongest track records and remains a long-term buy.
Do pipelines sound boring to you? Here’s a wake-up call: As Jim says, making money isn’t boring. And these are names that are making bank right now. Case in point: In yesterday’s down market, both names were up about 1 percent. Both provide upside from their near-6 percent dividend yields they both sport along with stock price appreciation.
Now, back to the names. While the KMP vs. PAA comparative analysis on Monday was a beneficial exercise—and one that is key to do when deciding between two names in the same sector—a question posted by inquisitive Mad Money caller, Lynn from Illinois—it’s important to note that a head-to-head comparison isn’t absolutely necessary with these two names.
Why? The all-time high list is the answer to that question. These are not names you should hold for a short period or a trade — their consistent track records of organic growth, acquisitions, and dividend payout make them long-term buys, along with their leverage to the very important infrastructure we need in this country. Ultimately, the two names fit together well—Geographically, PAA has more exposure to the Bakken and Eagle Ford (key oil areas we have highlighted on "Mad Money") while KMP is more diversified and focused on natural gas transportation, nat gas liquids infrastructure, along with its CO2 business.
Furthermore, both are well positioned here. PAA? What sets it apart is its asset footprint in the high plains (Bakken / Williston basin). To the extent that there is a whole lot more crude oil found in this country, that requires much more infrastructure. Not to mention that the recent acquisitions the company has made in the past couple of weeks—including the purchase of BP’s natural gas liquids business in Canada—are strategic boosters that diversify the business and gives it exposure to growth areas. KMP? Ultimately, Kinder is one of the ‘big boys’ in the MLP space—along with Enterprise Products Partners. It’s a well-diversified name, and Richard Kinder ultimately pioneered growth MLPs and has a stellar track record. Importantly, many considered KMP to have slow growth of late (law of large numbers—i.e. it got too big), but the pending acquisition by Kinder Morgan—KMP’s general partner—of El Paso is significant for KMP, as KMI drops down a significant portion of EP’s interstate nat gas assets to KMP over time ($10bn worth of assets). People underestimate the growth opportunity here.
The bottom line: Why would you buy either of these, never mind both, at their all-time highs? Because they have more room to grow. And their strong yields are particularly well suited for the current uncertain environment, even on an up day. Indeed, PAA may have some more near-term upside, but if you are looking long-term, sometimes it’s good to own a portfolio of names within a group (of course along with exposure to other sectors) in your stock portfolio. Both PAA and KMP are benefitting from growth and growing trends in different areas, and both can be bought for the longer-term. Think about MLPs when you are looking for yield in the current environment—they have been a group that "Mad Money" has been behind for a long time and they remain buys here.
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