This Stock’s 10.1% Yield Looks Safe

“In this world, nothing can be said to be certain, except death and taxes.” – Benjamin Franklin

Unfortunately, there isn’t a good way to invest in government tax receipts at this time. Treasury bonds are a horrible investment and will continue to be as interest rates rise.

But death is another story.

I hate to be morbid, but it’s a booming business. It’s recession-proof. And people don’t stop giving up the ghost just because times are tough.

You can see from the chart below that deaths have risen steadily for decades.

Obviously, that’s because the population has grown significantly. The more people who are alive, the more who will eventually die.

[ad#Google Adsense 336×280-IA]If you’re in the death business (or investing in one), it’s a great time to be alive.

That must be why Wealthy Retirement reader Jim asked me to look at the dividend safety of Stonemor Partners L.P. (NYSE: STON), a master limited partnership that owns 277 cemeteries and 92 funeral homes in 28 states.

The company first started paying a distribution in 2005 and has raised it every year since at an average rate of 3%.

Even more, the current 10.1% dividend yield is exciting enough to raise the dead.

In the first half of 2013…

  • The company’s revenue grew by $1 million to $122 million.
  • Distributable free cash flow climbed 57% to $42.5 million.
  • It paid out $25.2 million in distributions for a payout ratio of just 59%, compared with 87% last year during the same period.

Now, keep in mind, of that $42.5 million, $8 million was related to a legal settlement that Stonemor won. But even without that $8 million, the payout ratio would still be a healthy 73%.

In all of last year, shareholders received $47.4 million in distributions against $65.3 million in distributable cash flow for a payout ratio of 72%. That’s lower than the 90% and 84% payout ratio figures for the full years 2011 and 2010 respectively.

The payout ratio represents the percentage of earnings or cash flow paid out in the form of dividends. Most analysts use earnings to calculate their payout ratios. Most analysts are also lazy. I use cash flow because it’s a more accurate representation of a company’s ability to pay the dividend.

Stonemor is not in the habit of giving shareholders big raises and management is committed to acquire more funeral homes, so I wouldn’t expect any large dividend increases in the near future. But as far as the safety of the dividend, unless we see distributable cash flow start to slide, it’s safe.

Stonemor has plenty of cash flow to sustain the distribution. And if management wants to continue growing the distribution by a few percentage points, it should have no problems there either.

Dividend Safety Rating: B

If you have a stock whose dividend safety you’d like me to analyze, leave the ticker in the comments section below.

— Marc Lichtenfeld

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Source: Wealthy Retirement