In June 2011, one of the first stocks I recommended on Seeking Alpha was Cedar Fair, L.P. (FUN). At the time it was trading at just over $19 per share and was coming off a recent history of very erratic dividend payments. (Technically, Cedar Fair does not pay dividends, but makes "distributions." Most financial sites, including Seeking Alpha, do not make a distinction.) The company had made a $0.25 payment in Q4 2010 (its only payment that year), one small payment in Q1 2011, announced a 10-cent dividend for Q2, and stated:
Assuming results continue to meet our expectations, we intend to pay $1 per unit in distributions in 2011. To that end, the board has already declared the quarterly cash distribution of $0.10 per limited partner unit payable on June 15. Looking ahead with that same assumption, our goal is to double the $1 per unit distribution in 2011 to $2 or more per unit in 2013.
Results certainly met expectations. 2012 is on track to produce a third consecutive record year. Not only was the $1 payment made for 2011, but the company recently declared a fourth-quarter distribution of $0.40 per unit, bringing the 2012 total to $1.60. Even more important for yield-hungry investors was the announcement that the "$2 or more per unit in 2013" is now scheduled to be $2.50. The increase of 56% is quite impressive and the share prices responded, hitting a new all-time high of $37.69 on Nov. 6. The shares have declined to $36.50 with the post-election sell-off the last two days. The forward yield is now 6.8%.
Equally important for investors should be some of the comments made by management during the recent earnings conference call, when CEO Matt Ouimet discussed the future distribution plans:
...we have stressed a quality distribution, referring not only to the annual amount, but the long-term sustainability as well.
When determining the 2013 distribution rate as well as looking at potential future distribution levels, the key factors considered by our board were: a strong balance sheet position and a cash generating capacity of our business; regular cash obligations such as cash for interest, taxes and new rides and attractions; the discretionary use of cash for items such as debt prepayments, strategic initiatives and incremental investments in our core assets; and finally, future cash obligations such as the increasing cash taxes current expected to occur in 2015, as we exhaust our tax NOLs.
Taking all of this into consideration, we are confident that we will have sufficient cash flow from our business and more than adequate liquidity will lift to sustain an annual $2.50 distribution per unit.
In addition, we expect the $2.50 per unit distribution not only to be sustainable, but also to grow in line with the growth of our business on an annual basis. The 2013 distribution will be our 27th consecutive year of paying a distribution to unitholders and it represents the highest distribution paid in the company's history. We are very proud of this fact, and look forward to producing the operating results that will allow us to increase this record amount, going forward.
Note that Cedar Fair stressed the importance of not only maintaining and growing the distribution, but also the importance of continuing to invest in its parks and hotels and pay down debt.
Ouimet has been CEO for less than two years and has introduced a number of new initiatives that have improved per capita spending and increased attendance at the company's theme parks. He also noted that the company is still learning from the initiatives introduced this year and expects to see continued improvements as it analyzes the results.
Whether or not management can achieve all of its objectives remains to be seen. Not only is the company's product extremely discretionary, but it is also subject to the vagaries of the weather. The weather during the month of October hurt attendance at the company's Halloween-themed events and will prevent 2012 from being an even better year.
In addition, the company carries substantial debt and might be considered too risky for some investors. Despite these caveats, I am impressed enough with the recent performance to add to my position in the company, although since I am looking at this from a yield perspective, I chose to open a position where I simultaneously bought the units and sold June $40 calls. (At yesterday's close, the transaction would reduce an investor's net cost to just over $35 per unit.) Not only do I have some downside protection on the price, if the units are called away, I still have the equivalent of two years' worth of distributions.