Has Kinder Morgan Energy Partners LP (KMP) Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock, then decide if Kinder Morgan Energy Partners LP (NYSE:KMP) fits the bill.

Kinder Morgan Energy Partners LP (NYSE:KMP)The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it’s certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind — while understanding that the master limited partnership structure introduces some wrinkles in using these factors to evaluate an MLP — let’s take a closer look at Kinder Morgan Energy Partners.

Factor What We Want to See Actual Pass or Fail?
Growth 5-year annual revenue growth > 15% (1.3%) Fail
1-year revenue growth > 12% 5.2% Fail
Margins Gross margin > 35% 47.7% Pass
Net margin > 15% 15.5% Pass
Balance sheet Debt to equity < 50% 149.7% Fail
Current ratio > 1.3 0.70 Fail
Opportunities Return on equity > 15% 21.1% Pass
Valuation Normalized P/E < 20 24.39 Fail
Dividends Current yield > 2% 5.8% Pass
5-year dividend growth > 10% 7.4% Fail
Total score 4 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 has kept its four-point score for the third year in a row. The units have been flat as well, leaving investors to rely on the MLP’s generous distributions as their sole return on their investment over the past year.