StoneMor Partners: For Income-Seekers With A Death Wish

Aug.10.12 | About: StoneMor Partners (STON)

Death Services provider StoneMor Partners (NASDAQ:STON) is a fan favorite of the income-starved crowd who want to believe in fairy tale endings. StoneMor closed at $23.46 on August 9, 2012 and boasts a 9.97% current distribution rate. Their annual payout has risen from $1.90 in 2005 to $2.34 at present. That's what sucks people into this horrible morass of a business.

I'll explain later how management has been able to make these payments despite showing losses in 2009, 2010, 2011, and 2012 YTD.

I'd venture to say that no sane individual who's taken the time to read and understand their latest annual report should feel comfortable owning STON units.

The MLP [master limited partnership] status makes for non-transparency for anyone who's not a CPA, a lawyer or both. Plodding through all the negatives is beyond the scope of a short article. Here are just some of the key risk factors that were fully disclosed in StoneMor's 2011 annual report: .

Comprehensive Risk factors:

1) We may not have sufficient cash to continue paying distributions at the current rate, or at all…

2) Our debt level could materially adversely affect our ability to operate our business

3) Restrictions in our debt agreements could limit our ability to make distributions to you

4) Material weakness was identified in our internal controls over financial reporting as of 2010

5) Potential changes in state laws or new laws could have a negative impact on our revenues and cash flow

6) Our general partner has conflicts of interest and limited fiduciary duties which may permit them to favor their own interest to you detriment

7) Holders of STON common units are not entitled to elect our general partner or its directors, which could reduce the price at which those units will trade

8) Our general partner can transfer its ownership interest without unit holder consent

9) Our general partner may transfer control to a third party without unit holder consent

10) We may issue additional common units without your approval, which would dilute your existing ownership interests

11) Cost reimbursement due to general partner may be substantial and will reduce the cash available for distribution to you

12) Our general partner has the right to require you to sell your common units at an undesirable time or price

13) You may be required to repay distributions you have previously received from us [claw backs]

14) Tax audit adjustments for prior years may reduce net operating loss carry forwards - increasing future tax liabilities

15) The IRS may contest our treatment of federal income tax positions causing adverse impact and costs which would reduce cash available for distribution to you

16) You may be required to pay taxes on income from us even if you do not receive any cash distributions from us

17) The IRS may challenge our treatment of common unit holders which could adversely affect the value of the common units

18) The IRS may challenge certain of our valuation methodologies which could adversely affect the value of the common units

19) The sale or exchange of 50% or more of our capital and profit interests during any 12-month period will result in the termination of our partnership for federal income tax purposes

20) You will likely be subject to state and local taxes and filing requirements in places where you do not live as a result of your investment in STON units

21) A unit holder whose units are loaned to a "short seller" may be considered of having disposed of those units. This could be the result of actions of your brokerage firm and without your direct consent or knowledge. If so, the unit holder would no longer be treated for tax purposes as a partner - triggering recognized gains or losses from the disposition.

Is the company doing well? You make the call. In the seven years since 2005 {the first full year as a public entity} STON has seen sales, cash flow, earnings and book value trend lower- all but revenues by huge percentages. GAAP losses have persisted since the end of 2008.

click to enlarge

Click to enlarge

How did management find the money to increase distributions while business was horrible? Increased net debt and secondary issuance of new common units. Long term debt ramped up from $86.3 million at YE 2005 to $220 million as of Dec. 31, 2011. STON units outstanding expanded by 124.6% from 2005 - 2011 and has grown even more in 2012.

STON's 2011 annual report showed this breakdown in terms of financing activities:

Financing Activity




3-yr Total

Cash Distributions





Debt Repaid





Newly Issued LT Debt





Proceeds - New Units Sold





Net Cash Provided





Click to enlarge

While not illegal, attracting new buyers by offering a (non-earnings supported) high yield is Ponzi-like in its methodology.

By the way, once quarterly distributions pass certain thresholds the share going to the general partners escalates outlandishly. GP's which contributed less than 1.5% of total capital can get 50% of payouts in excess of $0.7125. What an incentive to jack up payouts with borrowed money! Common unit holders pay the interest while General Partners reap the rewards.Click to enlarge

Here are the independent views from Morningstar and Value Line on the partnership…

Click to enlarge

Value Line's lowest financial strength rating is C (unless currently in default). Timelines, safety and Technical rating run from 1 - 5 (1 being best). The numerical ranks (chart on the left) run from 5th - 100th percentile (100th is best).

'Chasing Yield' can be a very dangerous sport. StoneMor Partners has been upfront in warning you. Caveat Emptor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.