TAKING STOCK: Kinder Morgan

Dear Mr. Berko:

I bought 1,000 shares of Kinder Morgan Energy Partners on your recommendation this April at $76 because of regular dividend increases and because I would get $5,560 in income, which is a 7.3 percent yield, and it would be tax-free. Now the stock is $97 because it's merging with three of Richard Kinder's other companies, and my new stock, Kinder Morgan, or KMI, will only pay me $4,400, which is a lot less. What am I missing here? Have I been screwed?

-ND, Joliet, Ill.

Dear ND:

You certainly have and royally, too. You've been gut-jabbed, pole-axed and backstabbed by Richard Kinder who founded Kinder Morgan Energy Partners (KMP-$96). However, that gain isn't worth bupkis when you realize how cleverly Richard sliced and diced his KMP shareholders. For each share of KMP you own, Richard will give you $10.27 in cash plus 2.2 shares of Kinder Morgan, Inc. (KMI-$40). So when the deal closes in December, you end up with 2,200 shares of KMI and $10,270 in cash. But according to estimates released by Richard's lawyers, your tax liability from the merger ranges between $12 and $18 a share. It seems that Richard has slyly taken KMP shareholders to the cleaners.

It won't be till December, when the deal is done, that thousands of bonkered shareholders will realize they've been short-circuited, shortchanged and given the short end of the stick by this merger. Frankly, I'm surprised that swarms of lawyers haven't descended on KMP owners who've been blinded by their quick share gains and don't realize that Richard has sucked several pints of blood from their incomes. For instance:

1) You know that Richard's merger reduces the annual income on your original investment from $5,560 to $4,400 on your new KMI shares, but do you realize the initial diminution of your income is $1,160, or 22 percent? Sort of like getting an unexpected cut in your Social Security benefits.

2) You know that the $5,560 income you got from KMP was not taxable. But most KMP investors fail to realize that the $4,400 in dividends from KMI is taxable at ordinary rates! So if you're in the 25 percent bracket, you only get to keep $3,300 after taxes. That's kind of like getting another cut in your SS benefits.

3) When you bought KMP at $76, you were getting nontaxable distributions yielding 7.3 percent. So again assuming you're in the 25 percent bracket, the net, after-tax $3,300 dividend you get from KMI yields only 4.3 percent. Richard is stealing money from you, and you're paying him to do it. Still, it's not the end of the world. An after-tax yield of 4.3 percent is attractive in this market, though it's a long way from your nontaxable 7.3 percent. Because KMP unit holders have zero voting rights, Richard has lassoed, hogtied and positioned you for branding.

Richard's surviving KMI (that's acquiring KMP, El Paso Pipeline Partners and Kinder Morgan Management) is a traditional "C" corporation that will run all four businesses under one name. You can either like it or lump it, and though I don't like it, I'm not going to lump it yet. Richard believes this merger will lower his cost of doing business and provide KMI shareholders a higher return by "maximizing optionality"-whatever that tommyrot term means. However, I acknowledge that Richard's past successes should give him credibility for the future. So the best alternative is to give him a chance to run KMI and hope he doesn't screw you again. KMI expects to pay a taxable $2 dividend in 2015. Richard tells us that this dividend should compound by 10 percent annually over the coming five years, suggesting it could be close to $3 by 2019. That dividend calculates to an 8 percent taxable return on your original investment plus potential share growth, and there's little else in the market today to match that performance. This merger doesn't benefit a single KMP unit holder who bought this stock for stable and growing income. Rather, it's more like a hard kick in the derriere with a long-toed boot.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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Published: Thu, Sep 11, 2014