Propane Stocks: Strong Dividends With Turnaround Potential

Includes: APU, FGP, SGU, SPH, UGI
by: Justin Kuepper

The low interest rate environment promised by the Federal Reserve should spark a move towards large cap dividend stocks. With government debt paying almost nothing, these stocks are seen as the safest alternative by investors looking for low-risk returns. For instance, during 13 years of low rates between 1938 and 1950, dividend stocks outperformed by 5.4% per year.

The problem is that many dividend stocks are already trading at lofty valuations. But one sector that appears cheap is the propane industry. According to TickerSpy, the sector has underperformed by S&P 500 by 14.3% over the past month. And with some key changes on the way, there could be a lot of upside potential in the industry.

The major players in this industry include:

  1. AmeriGas Partners LP (NYSE:APU) - 7.21% Yield
  2. Ferrellgas Partners LP (NYSE:FGP) - 12.27% Yield
  3. Star Gas Partners LP (NYSE:SGU) - 6.78% Yield
  4. Suburban Propane Partners LP (NYSE:SPH) - 7.93% Yield
  5. UGI Corp (NYSE:UGI) - 3.79% Yield

Propane Industry Faces Many Challenges

The propane industry has faced a number of different challenges throughout the economic crisis. High commodity prices have hurt its profit margins, while the weakness in the housing market has hurts its sales. And recently, unseasonably warm weather has hurt its sales and led to lower volume and margins as consumers needed less heating.

But some investors believe that much of the bad news is already priced into the sector. Companies like Ferrellgas are trading down nearly 43% over past year, while all of the aforementioned companies have fallen at least 13% over that time period. As a result, any unexpected positive news could therefore result in a significant turnaround.

Challenges Now Could Spell Opportunity

The challenging operating environment for propane companies has forced many to slim down and restructure their operations. These leaner businesses could help dramatically improve margins and performance when the market turns. Others have focused on improving their market share, which could lead to higher sales when a recovery takes hold.

In the meantime, investors can benefit from some of the healthiest dividend yields found anywhere in the U.S. markets. These yields have been consistently paid out and are considered to be relatively safe given the limited partnership structure utilized by most of the industry's key players mentioned above in this article.

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