"Propane isn't just clean burning. She can also be a dirty girl."
Those are the words of Hank Hill, from Mike Judge's brilliant animated sitcom "King of the Hill," and they were floating through my head this week, as I researched Suburban Propane (SPH) . SPH shares are down 2% now, after a nice pop Thursday, and now sport a current yield of 8.57%. Yes, that is not a typo: 8.57%.
That's it, right. Just buy it, set it and forget it and cruise the portfolio with a spread to the 10-year US Treasury note's current yield of 1.56% of a mere 701 basis points. Jackpot!
OK, it's not that easy. Before I invest in any of my or my clients' funds in an income security -- suburban is a limited partnership -- I try to make damn sure that payout is safe, and any margin is to the upside. SPH paid its most recent dividend on Tuesday, at a rate of $0.325, the numerator in that fantastic 8.6% yield. But a quick check of nasdaq.com shows that that quarterly payout was above $0.86 per quarter from 2103-2017 before being cut to $0.60 per quarter in 2017, and then to $0.30 per quarter in those dark COVID days of 2020. So, the current rate is actually a slight improvement, but still less than half the historical rate.
What happened?
I went back and read Suburban's 10-K's from 2016 and 2017 (yes, we nerds actually enjoy doing this) and I think the company was trapped in a box of too much high-yield debt and a very warm winter of 2016, which hammered Suburban's retail propane deliveries. So, SPH's leverage topped five-times and its payout ratio dropped to 0.61. Payout ratio numbers below 1.0 are scary, and that level was unsustainable. Something had to give, so hence SPH's much lower quarterly payouts.
Fast forward to 2021, and everything is fine. On Wednesday, Suburban reported its fiscal 2021 earnings and showed annual revenue growth of 16.3%, as higher propane prices catalyzed a 4.2% increase in gallons shipped, and adjusted EBITDA of $276 million vs. $254 million in 2020. That EBITDA level represents more than three-times coverage of SPH's annualized dividend rate of $1.30. Rock solid.
But, of course, securities are valued based on future prospects, and I think SPH, like other propane distribution LPs like Ferrelgas (FGPR) and Amerigas (whose parent is UGI (UGI) ), are viewed as proxies for the coldness of winter, when the bulk of demand for propane occurs. October was warmer than normal across most of the U.S., but the most recent numbers published by the American Gas Association showed a marked increase in heating degree days across the U.S. in the week ended Nov. 6.
But, I am not buying SPH today in hopes of a cold winter.
I really want the 8.57% yield, and, since it's 2021, possibly an ESG angle, too. Bingo. Suburban owns 39% of California-based Oberon Fuels, a producer of renewable dimethyl ether. Oh, man, that is the holy grail of renewable fuels. DME (C2H6O) is an ideal fuel for the energy transition, and like ammonia, also a great carrier of hydrogen, although DME has twice as many hydrogen atoms as ammonia does. On my LinkedIn I have some hardcore DME/rDME folks, and, let me tell you, those guys are true believers. It just makes so much sense and is sourced from biomass (yes, that's a little gross) unlike the electricity to power Elon Musk's Teslas (TSLA) , which all comes from lightning rods. Ha!
So, as Hank Hill memorably said about his son, Bobby, "that boy just ain't right." SPH's dividend yield of 8.6% is just plain wrong, from an economic perspective, anyway. If you want to play the coldness of the winter and watch NYMEX propane futures based on the Mont Belvieu, Texas benchmark, go ahead. Propane prices have surged in 2021, as have those for every other hydrocarbon.
I am just going to put a chunk of SPH in my and my clients' portfolios -- I love to buy on down days -- and leave it there for years.
