Suburban Propane Waters Down Its Stock

In a move that is not uncharacteristic of an overpriced stock, Suburban Propane Partners (SPH) has issued 2.2 million shares at a market price of $41.50.

SPH, a 10 year-dividend achiever, might as well shout from the hilltops that they don't think their price can go much higher; it seems they think that if they can unload these share on the public, then so much the better.

SPH basically said that it was going to pay down debt with the money raised from the sale of the stock. So what they're doing is watering down the stock (diluting per share earnings) in a maneuver known as "Robbing Peter to Pay Paul" method of accounting.

You've got to admit, it is a great strategy from the perspective of the company with overvalued shares, but current shareholders are getting the shaft.

In a May 5th article, I pointed out that SPH was at a relatively high price and should be considered for selling, the recent issuance of shares is the final nail in that coffin.

Disclosure: No positions

Comments

[The Little ...:]

SPH has done wonders in increasing its earnings and dividends in the face of adverse conditions. Raising new capital by selling stock is more conservative than by taking on more debt. SPH is improving its balance sheet. If its to its advantage to sell stock at the higher price, that advantage is also belongs to its stockholders. This balances the dilution.

Aug 24 09:51 PM

[Oldguy67:]

your over concern for capital gain from a dividend
stock that has paid a steady stream of increased
dividends year after year does not make sense.

If you are investing for income capital gain is welcome
and for most of the dividend paying stocks I own have
appreciated ofer time.

My son found this stock years ago and we continue
to add to our shares.

Ca ching.

Aug 25 08:43 AM

[Steven Ward:]

I own this stock for several reasons. One reason: several years ago I struck up a friendship with a local propane seller and he told me that customer loyalty in the propanr business is intense. Wholesale buyers and retail buyers rarely switch dealers.
On what basis is SPH overvalued, compared to its peers or the S&P 500 or 1000?
It is not overvalued based on past history. Overvaluation can only come with a dividend cut. Now that would really hurt the shareholder and not the current dilution that will eliminate a corresponding amount of debt.
Nothing untoward here, just good management doing the right thing.

Aug 25 11:12 AM

[Max from Ma...:]

Partners in Suburban Propane have invested for the dividend.

Partners in Suburban Propane who have held the stock for a long time are discouraged from selling by the tax code which allowed Limited Partnerhips to shelter income avoiding double taxation. Long term shareholders could readily have a tax bill based on all of their proceeds at ordinary income rates.

Barring a significant dividend cut there is little to motivate an SPH holder to sell, and the share price is irrelevant.

Aug 25 12:09 PM

[Dividend Inc:]

Greetings all,

Thanks for all the balanced remarks on this article that I have written. Believe me, As a Dividend Achiever, I will definitely acquire SPH at the right price. However, in my experience in the investment banking industry the method that I have describe in the article remains accurate.

In addition, and not mentioned in the article, insider holdings is far less indicative of management's stake in the company. Most executives and large shareholders are given loans against the value of their shares at below market rates. This effectively enables the executives to get around rule 144 and other obvious signs of insider selling.

As part of the overall commodity boom, SPH is a great holding with a significant advantage as mentioned above. Whenever the price of oil gets too expensive, propane becomes the viable, cheaper substitute. However, early signs of weakness need to be identified so that purchased and sales can be optimized whenever possible, regardless of the power of compounding.

Thanks again for commenting on my thoughts. As I have done in the past, I'll be tracking this stock to acquire this solid Dividend Achiever at more reasonable levels.

-Touc

Aug 25 04:24 PM

[Max from Ma...:]

Touc

Tell me how your methodology can recommend a sell at a 25% or higher tax rate which may be assessed on a long term holder of SPH.

As a dividend investor it would be almost impossible to find any investment which could provide the same yield on the after-tax proceeds.

Short of a dramatic cut in dividend there is no reason for an investor to sell.

Certainly your methodology might affect the decision of a trader to buy SPH.

The term investor which is often misapplied to traders and speculators is key to the strategies associated with tax-sheltered limited partnerships like SPH.

Its too bad there are few analyst who understand our needs

Aug 27 11:56 AM

[Dividend Inc:]

Greetings Max,

There are several reasons why SPH is a company that I would comment on.

First, I track only dividend paying companies that have increased their dividend every year for at least 10 years in a row. SPH has met that criteria.

Second, my investment policy dictates that I start researching (within the parameter above) when they have reached a new low as possible purchase candidates. Conversely, I sell or recommend selling companies that have reached a new high.

Third, the issuance of new shares is always a sign of weakness in the stock down the road. This became a red flag for me especially since SPH was getting up there in price.

Fourth, I only aggressively buy and sell with my investment policy because the money is in a tax deferred account. As you seem to indicate, your investment of SPH is a non-tax deferred account.

There may be no merit to my approach after you have compounded over the entire history that this company has been public. Therefore your inability or unwillingness to sell is more than justified.

My commentary on SPH is strictly for those who have already read and understand my investment policy as posted on my blog (dividendinc.blogspot.c....)

Thanks for discussing your dilemma further.

Touc.


On Aug 27 11:56 AM Max from Massachusetts wrote:

> Touc
>
> Tell me how your methodology can recommend a sell at a 25% or higher
> tax rate which may be assessed on a long term holder of SPH.
>
> As a dividend investor it would be almost impossible to find any
> investment which could provide the same yield on the after-tax proceeds.
>
>
> Short of a dramatic cut in dividend there is no reason for an investor
> to sell.
>
> Certainly your methodology might affect the decision of a trader
> to buy SPH.
>
> The term investor which is often misapplied to traders and speculators
> is key to the strategies associated with tax-sheltered limited partnerships
> like SPH.
>
> Its too bad there are few analyst who understand our needs

Aug 27 01:38 PM

[bern7744:]

touc has impliedly told everybody why he recomends a sell 0n SPH. He wants to buy it cheaper.to say the least.this is unethical behaviour.

Aug 28 01:19 PM

[Dividend Inc:]

Hey Bern,

Thanks for getting to the heart of the matter. I definitely want to buy a quality company at lower levels, but only if the fundamentals support it at the time. My suspicion is that this company will have to cut the dividend as the price declines, in which case I wouldn't buy the company at all.

Unfortunately, the reference to me wanting to buy the stock at a lower level being unethical is flawed for at least two reasons. First, I'm not shorting the stock. Second, there is no crime pointing out a fact that will dilute the company earnings. Third, my words can't sway the majority of buyers and holders of SPH to sell or not buy this company. I'm really a non-factor in this equation, even though you imply otherwise.

Several people, as shareholders, have articulated reasons why the issuance of the shares isn't bad at all. does this mean that as shareholders they are acting unethically in their own interests? I don't think so. I think they are demonstrating a knowledge that adds to what I think I already know.

Bern, visit my blog and look at my research and sell recommendations. I think that you'll find that I'm not really the hater that I appear to be. Of course, if you're truly disinterested in stock investing then my blog might qualify as mindless drivel.

Thanks for checking out my article.

-Touc


On Aug 28 01:19 PM bern7744 wrote:

> touc has impliedly told everybody why he recomends a sell 0n SPH.
> He wants to buy it cheaper.to say the least.this is unethical behaviour.

Aug 28 10:03 PM

[User 492773:]

Too much focus here on the income statement. Incurring 4 cents of dilution to increase book value from $7 to $16 by selling stock at 4x book looks smart to me. This co needs to deleverage to gain the flexibility to make future acquisitions. Selling stk at a high price is a much better strategy than a share repo at too high a price, as we have seen by all the mindless share repos at the top of the market.

Sep 28 03:01 PM