Billionaire Fayez Sarofim, who was born in Egypt but became a U.S. citizen in 1961 and graduated from Harvard Business School, manages a large investment fund which has helped build his wealth into the billions. Sarofim serves on the Board of Directors of Kinder Morgan Inc (NYSE:KMI), and had owned over 21 million shares of the company before a recent purchase of 600,000 shares at an average price of $34.76 per share. As an insider purchase, this transaction was reported in a filing with the SEC. Kinder Morgan is an owner and operator of midstream energy infrastructure including pipelines and terminals. It also owns interests in other pipeline companies including the similarly named Kinder Morgan Energy Partners and Kinder Morgan Management. See more insider trading activity at Kinder Morgan.
A number of hedge funds reported large positions in Kinder Morgan at the end of June, though this is partly due to the company’s acquisition of El Paso (many hedge funds had bought shares of El Paso as a merger arbitrage play and received shares of Kinder Morgan post-merger as a result). However, some funds owned shares of the company even before that, with the merger causing a dramatic increase in their holdings as well. Bain Capital’s Brookside Capital owned 6.4 million shares at the end of the second quarter, but had previously reported a position of 2.5 million shares (research more stocks that Brookside Capital owned). Billionaire Stephen Mandel’s Lone Pine Capital, to give another example, had more than doubled its position in the first quarter to a total of 4.2 million shares, and had then reported owning 17.6 million shares at the end of June (see Lone Pine’s top stock picks).
At a market cap of $36 billion, Kinder Morgan trades at 25 times analyst consensus for its 2013 earnings. Even with strong growth, and the likelihood that pipelines will be a good business to be in for the next several years as onshore U.S. oil and gas production matures and requires additional infrastructure in order to bring this production to domestic markets and to export facilities, that strikes us as high. We would note that like many pipeline companies, Kinder Morgan pays a large dividend yield. Based on its four most recent quarterly payments, the current yield is 3.7% and based on annualizing its most recent quarterly payment (the dividend level has been up slightly in the last few quarters) the yield is 4.1%.
Other oil and gas pipeline companies include Enterprise Products Partners L.P. (NYSE:EPD), Williams Companies, Inc. (NYSE:WMB), Plains All American Pipeline, L.P. (NYSE:PAA), and Spectra Energy Corp. (NYSE:SE). All four of these companies, like Kinder Morgan, offer dividend yields between 3.5% and 5.0%. Their forward P/E multiples also tend towards the high end, though they do tend to be lower than Kinder Morgan’s: Enterprise and Williams carry forward P/Es of 20 or more, while Plains and Spectra trade at 17 and 16 times their respective forward earnings estimates. While the dividend yields of all of these companies certainly are appealing, we’d rather look more closely at pipeline companies whose pricing seems cheaper. Recent earnings performance of these companies has been extremely diverse: Plains and Enterprise grew their earnings by at least 30% in their most recent quarterly report compared to a year earlier, while Williams and Spectra saw their net income fall by 20% or more. As a result, our first choice for further analysis here would be Plains.
We like the pipeline industry, but wouldn’t advise following Sarofim into his purchase of Kinder Morgan as the company seems overpriced relative to its peers. Some companies in the industry are priced at a substantially lower multiple of estimates of their earnings for next year and still offer similar dividend yields and exposure to the attractive opportunities of the pipeline business.