by Dividend Growth Investor | March 18, 2014 9:05 am
Warren Buffett is the most successful investor in the world. If someone had put $10,000 in his partnership in 1956 and stayed with him, approximately 57 years later their stake would be worth almost $1 billion.
I have been on a mission to learn as much as possible about this successful investor, and hopefully implement some of those lessons to improve my own investing. In the process of my reviews, I noticed some striking similarities between Warren Buffett and Richard Kinder, who is the CEO of Kinder Morgan Inc (KMI).
I have owned Kinder Morgan Management LLC (KMR) for a little over 5 years, and Kinder Morgan Inc for over 3 years now. In my research of the Kinder Morgan Companies, I have uncovered striking similarities between the founder and main shareholder of Kinder Morgan and investing legend Warren Buffett. Of course, correlation is different from causation, but never the less I think it pays to pay attention to certain traits of successful CEO’s. I believe these characteristics could pay dividends for shareholders for years to come.
The first striking characteristic is that both men have the majority of their net worth in the stock of the companies they manage as CEO’s. Buffett has a 21.40% economic interest in Berkshire Hathaway (BRK.A, BRK.B) , while Richard Kinder owns 23.30% of Kinder Morgan Inc. I really like to see when CEO’s have most of their net worth in the company they manage, because this shows that their interests are aligned with the interests of ordinary shareholders. What can I say, I admire investors with skin in the game.
In addition, both men take nominal salaries from the companies they manage, compared to other CEO’s. Warren Buffett earns a $100,000 annual salary from Berkshire Hathaway, while Richard Kinder earns a mind-boggling $1 per year. Of course, they are not relying on these salaries, which are pitiful compared to the gargantuan packages that executives earn these days.
Buffett has approximately 1% of his net worth in various investments, which earn him a high enough dividend income to pay a lower tax rate than his secretary. Richard Kinder on the other hand derives most of his income from dividends paid by Kinder Morgan Inc to shareholders.
With over 240 million Kinder Morgan Inc shares, Richard Kinder makes approximately $400 million in annual dividend income. You can bet that he would do anything within his control to ensure that his stream of dividends increases over time, and that his stake becomes more valuable. Because qualified dividend income has preferential tax treatment, Richard Kinder would not pay more than 23.80%.
Both Buffett and Kinder seem to be focusing their best efforts on activities they like, which are also within their circles of competence. Buffett has been a student of business and investing for almost his entire life. Richard Kinder has had a career in law, followed by working at Enron until 1996. At one time, he was one of the most likely to succeed Ken Lay to the CEO position at Enron.
Unfortunately for Enron, the company did not promote Richard Kinder, which is why he left in 1996 and started his journey as the Buffett of Energy. He purchased pipeline assets from Enron, and started acquiring more pipelines and other energy gathering assets in order to gain scale. In addition, he took advantage of the master limited partnership structure for tax purposes, which was not common at the time.
The thing that really strikes a resemblance between the early days of the Buffett partnership and Richard Kinder is the smart use of leverage. For example, Warren Buffett earned as a performance fee a quarter of all partnership returns above 6% in a given year. He then plowed most of those fees back into the partnership as limited ownership stakes. Because Buffett’s investment partnership routinely made more than 6% per year, he ended up collecting millions in fees, while allowed him to end up with a high net worth by the time he wound the partnership down in 1970.
Richard Kinder on the other hand owns a large stake in the general partner of Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB). The general partner earns incentive distribution rights, which essentially allow them to a greater share of incremental growth in cash flows from the limited partnerships. In addition, the general partner also owns portions of the limited partners.
Either way, my highest portfolio position is Kinder Morgan Inc, as it offers a high current yield, plus solid dividend growth. I also own a pretty size-able chunk of Kinder Morgan Management LLC, where instead of distributions I receive more shares.This is also a great way to gain exposure to MLPs in a tax-deferred account, particularly if you are afraid of the UBTI.
Therefore, the growing distributions are automatically reinvested, thus further turbocharging the compounding effect there. Once I retire however, I would likely convert those shares into partnership units of KMP, so that I can live off the income.
Hopefully the spread between KMR and KMP narrows by then. Otherwise, if you are a long-term investor who wants to purchase KMP units, but don’t need the cash for years, I would strongly suggest KMR instead.
Full Disclosure: Long KMI, KMR, BRK.B
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