Propane probably isn't an energy source most investors spend a lot of time thinking about. As hydrocarbons go, propane is pretty versatile serving as a fuel for cars, trucks, home heating, etc. Yet most investors when asked to name energy stocks would probably name Exxon (XOM), Baker Hughes (BHI), Whiting (WLL), and Kinder Morgan (KMP) long before they would ever come up with a propane name. And that's unfortunate, because propane stocks offer a steady dividend and a nice fat yield for investors who are willing to pay a little attention to these under recognized names.
This article is a basic intro to the three main players in the propane space. Right now, all three of these stocks, (like so many others), are near 52 week highs, so investors should probably wait for some pullback before buying them. However, even now at these lofty share price levels, all three of the names I include here have dividends ranging from 7-10%, and indeed patient investors will probably be able to pick up one or more at dividends north of 10% sometime in the next 12 months.
Amerigas Partners (APU) is a mid-sized $4.2 billion firm with a 15% market share in the propane market. Their main business is retail distribution of propane via their 2,100 retail locations to roughly 2.3 million customers. In early 2012, the company completed a mega-merger in the space buying rival Heritage Propane and significantly expanding Amerigas' footprint. APU currently yields about 7.5% and management has a stated long term goal of increasing this dividend by 3-5% per year.
The first thing most investors will notice in looking at Amerigas or any of the other propane stocks, is how weak their earnings per share numbers look (see chart below). To the uninitiated investor, the propane stocks look like they don't earn enough cash to cover their dividends, and their earnings look extremely volatile. Technically, both of these things are true. In 2012 for example, Amerigas earned 0.41 per share, but distributed $3.16 a share in dividends. Any sane investor following normal rules would expect an imminent dividend cut. Yet as this graph shows, not only has APU maintained their dividend, but they have actually increased it dramatically over time.
The key to this seeming contradiction is that stocks like APU have large amounts of depreciation that they can take over time. As a result, EBITDA is a better metric to assess how safe the stock's dividend is. In this case, EBITDA to distribution is actually 1.76 times, suggesting that the firm has plenty of firepower to maintain its dividend even in the event of a temporary drop in sales.
Amerigas and both of the other propane companies I will mention here also suffer from severe seasonality in their businesses. Most of the propane that is sold by these firms is used for home heating, by roughly 3-4% of households and commercial businesses primarily between October and March. While this 3-4% figure for the industry as a whole has been relatively stable for the last couple decades, there is reason to hope it might increase in the next few years. Propane prices have been falling recently due to increased supply resulting from the explosion of natural gas drilling in North America. As a natural gas derivative, propane's price tracks that of natural gas, and the fall in natural gas prices over the last few years has made propane more attractive as a heating source compared with oil, natural gas itself, and electricity.
APU's financial statistics for the last few years can be found in table below. Note that in 2009 the firm paid a special dividend which is why their payout is higher than 2010, and that in 2012, the firm took on a large amount of debt associated with the Heritage Propane merger. Figures are in millions except per share amounts.
Ferrellgas Partners (FGP) is the second propane company I want to highlight. The firm pays a mammoth 9.5% dividend, and is about half the size of Amerigas Partners. The stock was recently upgraded by one of the few research firms covering it, (S&P, from hold to buy) on the strength of the firm's improving customer demand and margins. Ferrellgas has about 8% market share in the propane markets, and roughly 1 million customers across the country. While FGP does have a higher yield than APU, unlike APU, it has not raised its dividend either. Instead, the company has consistently paid out $2 per share annually since 1995. (See dividend history here.)The firm's financials are below.
All in all, FGP is a bit riskier as an investment, but given the firm's solid track record and the positive prospects for propane stemming from increased natural gas exploration in North America, the firm should look attractive for those investors looking for a stable dividend pay.
Finally, Suburban Propane (SPH) is perhaps the biggest dividend growth play of these three propane stocks. The firm has nearly doubled its dividend in the last decade, with consistent increases each year. Serving 750,000 customers out of 300 locations, the company has a $2.7B market cap and a dividend yield around 7.5%. The company acquired assets from Inergy (NRGY) distorted net income for the year, and increased the firm's liabilities markedly. However the company expects to achieve significant synergies between their operations and Inergy's and looks likely to be able to keep ramping up their dividend going forward. Analysts on average are looking for a $0.10 per share dividend increase each year from now until 2016, and the acquisition should help make that feasible.
In summary, while these propane plays are certainly a bit out of the ordinary for many investors, and propane is a fuel many people don't have much experience with, these stocks all have very long track records of successfully operating their operations and paying out major dividend to shareholders. Given that, any investor looking for income would be wise to look at these firms now or in the future if their stock prices come down a bit.