An interesting thread over at Yahoo's KMR board got me looking at the results of alternative investments in KMP and KMR. As this topic is applicable to the KMP community as well as the KMR one, I am posting my analysis here as well. The KMR discount went up a lot last fall ("discount" means how much lower the KMR price is than the KMP price...today it is at 14%, way above the old normal range of 5 to 8%). The rapid rise in the KMR discount has hurt KMR's total return compared with KMPs. Here is the results of an analysis of the total returns of two alternative investments

I ran an analysis as follows:
1) Purchase $10,000 worth of KMP and KMR at closing price on 1/3/2006 (first trading day of 2006). No reason to pick this date...just had to start somewhere.
2) Hold onto all KMR dividend shares
3) For KMP, take distribution $$ when received and purchase more KMP units at the closing price of payment date (no transaction costs).
4) analysis all through 9/11/09 (this past Friday), so analysis is for just under 3.75 years.

Results:

KMR: you now have 32.8% more shares then you have started with
KMP: you now have 30.5% more units than you started with.

So...the higher yield every quarter is working...your KMR # of shares has grown faster than the KMP # of shares.

BUT the relative prices have changed also. Which investment now has a higher total value?

Up until September 2008 KMR was doing better the majority of the time. It hit an all-time peak on 12/17/2007 when the KMR investment was 7% ahead of the KMP investment (on that date the original $10k had grown to $13,125 for KMR, $12,258 for KMP). At the end of September '08 KMR was still looking good (+4.1% over the KMP investment).

But as the overall market hit the wall in October, the "KMR discount" started to soar. KMP was getting hit hard, but KMR was hit significantly worse. At a sharp trough on 12/10/2008 the KMR total investment was 10.5% behind KMP. Both were still up from the purchase date, but KMP was at $12,375 and KMR at $11,082.

Things got worse for both investments, hitting a low total value for this pair of investments on 3/9/2009. The KMR investment was slightly under water ($9,900), and KMP was at $10,585. So KMR was then "only" 6.7% behind KMP.

Since then both KMP and KMR have rebounded nicely. On 9/11/09 (last day of this analysis) the KMP investment was worth $14,435, and the KMR investment was worth $13,525. So over this particular analysis period (Jan 06 to Sep 09) the KMR investor is 6.3% behind the KMP investor.

It is worth noting that both have done relatively well through these very troubled times. The KMP investor has a total return of 9.95%/year, and the KMR investor has a total return of 8.18%/year. The S&P 500 was down 5.3%/year over that period.

Bottom line: the rapid increase in the KMR discount in October 2008 has had a serious impact on the medium term (3.75 year) outcome for the KMR investor, and pretty much determines the outcome of this KMP vrs. KMR analysis. KMR started 2006 at a 6% discount, and has fallen to a 13.5% discount (on 9/11/09). That drop of 7.5% in relative value more than offsets the 2.3% greater increase in the shares the KMR investor has.

KMR's price would have to climb to $49.66 (holding KMP's price constant) for these two investors to be equal. $49.66 would be a KMR discount of 8.3% (KMP's price was $53.8 on Friday). An 8.3% discount is well within the historical normal discount range, but a smaller discount than we have seen since December '08. The discount has been over 10% in almost all of 2009 (it hit 9.5% one day in Feb.). The current discount (14% today, 9/16) is above average even for 2009 (average has been 12.1%)

In the next post I do some "what if" analysis looking forward to see what happens if the discount does close.