In a recent article, Brian Harper asserts that StoneMor Partners' (STON) dividend is not sustainable. The title of his article itself should arouse the suspicions of MLP aficionados: STON does not pay a dividend, it pays a distribution.
STON is a Master Limited Partnership, a fact Harper does not acknowledge in his analysis. His references to STON stock and dividends, rather than units and distributions, suggest a lack of familiarity with the MLP sector. This is evinced by Harper's focus on STON's equity issuances. In fact, that is exactly how all MLPs expand. By design, they pay out nearly all distributable cash flow and issue more units to fund growth. Just look at equity issuances for well-known MLPs like Kinder Morgan (KMP) or Enterprise Products (EPD). Both have issued equity as frequently as STON. STON's equity issuances are not suspicious -- or even noteworthy.
Harper takes issue with STON's focus on non-GAAP accounting. Again, this is standard practice among MLPs. Conventional GAAP earnings measures and ratios like P/E ratios are just not very useful for evaluating MLPs. Measures like Distributable Cash Flow (DCF) are far more illuminating.
STON has good reason to focus on non-GAAP measures. Earlier this year, I sat down with company CFO Bill Shane. We walked through theoretical transactions of someone buying a burial plot, vault, marker, and casket--comparing how the numbers appear, using both accrual and GAAP accounting methods.
The PR problem for STON is that the GAAP accounting method required by the SEC makes some good numbers look bad. For example, when a customer makes a “pre-need” purchase for $5,400, only $1,000 of that can be recognized in the year it’s made, even though STON puts money in the trusts right away to pay for the “merchandise” and take care of the graveyard plot. The bulk of the revenue ($3,800) is not recognized until two years later. The remaining balance is not recognized until the person is actually buried.
This isn’t a problem for a company that isn’t growing—the unrecognized revenue evens out over time. But for a company like STON that is acquiring numerous properties and growing at a breakneck pace, the increasing amount of unrecognized revenue makes the company look less successful than it actually is. In fact, the faster the company grows, the worse it looks. This is the key point: When STON grows fast, recognized costs go up right away, but recognized revenue lags.
In a meeting earlier this year, I confirmed with CEO Larry Miller that they are still able to acquire small operator cemeteries and funeral homes at 3X EBITDA as they were 2 years ago. Other MLPs get excited about acquisitions at 5X or 6X EBITDA, so this is really remarkable. That means the company will continue to grow at a rapid pace and increase distributions. The costs of those who are short the stock will continue to increase correspondingly.