Before I get started on today’s column, I have to give kudos to Wealthy Retirement Analyst Kristin Haugk.
On February 11, she wrote a Safety Net column on Freeport McMoRan (NYSE: FCX), giving the stock an “F” for dividend safety. She ended her column by stating, “Cutting or eliminating the dividend is the next logical step.”
Management took that step earlier this week, slashing its dividend by 84%.
And now, let’s see if a 9% yielder is safe…
Usually, when I see a 9% yield, alarm bells go off in my head and I start looking for problems. That’s precisely what happened when I researched Ferrellgas Partners (NYSE: FGP).
Ferrellgas Partners is a limited partnership that sells propane (and propane accessories – for my King of the Hill fans).
It owns the well-known propane brand Blue Rhino, which is available at 46,000 locations, such as Wal-Mart, Lowe’s and Walgreens.[ad#Google Adsense 336×280-IA]It is the second-largest retailer of propane in the U.S. AmeriGas Partners (NYSE: APU) is the largest.
As a limited partnership, shareholders’ dividends are mostly tax deferred. (For more on how this works, see what I’ve previously written on this feature.)
The company has been in business for 75 years and has paid a $0.50 per share quarterly dividend since 1994.
In good times and bad, shareholders have received their $2 per year in dividends.
Over the past 12 months, the company generated $193.4 million in distributable cash flow (DCF). DCF is the measure of cash flow that is commonly used in partnerships. During that time, the company paid investors $162.9 million for a DCF coverage ratio of 1.18. In other words, the company’s cash flow exceeded its distribution by 18%. Last year at this time, the company’s DCF was just about the same, at $193.9 million, while distributions were slightly lower, at $158.2 million.
So the company has been consistent lately and has plenty of cash flow to pay the hefty distribution, plus have some left over.
That wasn’t always the case. In 2011 and 2012, the distribution was higher than DCF. If that were the case today, I’d be concerned (even with the company’s stellar track record of paying $0.50 per quarter every quarter). I can’t give a company my highest rating if it can’t pay the dividend from the cash it generates.
It makes me uneasy when a company has to dip into its cash on hand, raise capital or take on debt to fund a dividend.
However, the past two years, the company’s DCF has been high enough to pay the dividend and then some.
Additionally, management’s commitment to the dividend is impressive.
It has done whatever it takes to pay it, even when the business didn’t support it.
It’s not the best method for ensuring the dividend gets paid. But it’s clear that the $2 annual payout is a top priority.
Given that Ferrellgas Partners has paid the same dividend for over 20 years, any reduction would be a drastic decision by management.
If that occurred, longtime shareholders would be out for blood.
The company may not always be able to afford the dividend, but it appears it’s going to keep paying it for a while.
In the near term, with cash flow expected to rise over the next couple of years, Ferrellgas Partners should have no problem meeting investors’ expectations of that reliable $0.50 per quarter dividend.
Dividend Safety Rating: A
— Marc Lichtenfeld[ad#IPM-article]
Source: Wealthy Retirement