Published December 7th, 2016
AmeriGas Partners (APU) is in the utility sector. Investors typically associate utility stocks with high yields, and AmeriGas is certainly no exception.
AmeriGas offers a huge 8.5% distribution yield right now. Not only does it offer a sky-high yield, but it has also increased its distribution for 12 years in a row. This makes it a Dividend Achiever.
You can see the entire list of all 273 Dividend Achievers here. In fact, AmeriGas is one of the highest-yielding Dividend Achievers.
This article will assess AmeriGas’ hefty distribution and its future prospects.
AmeriGas isn’t like your typical utility. It is a distributor of propane gas. In fact, it is the largest propane distributor in the U.S.
It sells propane and propane accessories to roughly 1.9 million customers. The core propane business represents approximately 89% of annual revenue. Related propane equipment and services generate the remaining 11% of annual revenue.
Its customer base is comprised of residential, commercial, industrial, agricultural, and others. A breakdown of its customers is as follows:
- 39% Residential
- 36% Commercial
- 15% Motor Fuel
- 10% Agriculture & Transport
AmeriGas has a positive business outlook. After all, customers need propane to heat their homes, cook their food, and dry their crops.
The company retains a strong relationship with its customers, particularly recently as AmeriGas has passed along considerable cost savings to its customers.
The spot price of propane has fallen significantly over the past several years. As a distributor, this means Americas passes those savings right along.
Source: 2015 Annual Report, page 12
These qualities provide AmeriGas with a great deal of stability. It generates strong profitability each year, even when conditions deteriorate somewhat.
For example, last year was not an ideal one for the company because of unseasonably warm weather. According to the company, last year was the second-warmest in the past 121 years.
This suppressed demand, but the company generated more than enough EBITDA to grow its distribution yet again.
Source: Q4 Earnings Presentation, page 17
That level of stability is great for income investors, because it fuels the extremely high distribution payout.
A trade-off to owning a company like AmeriGas is that it may not generate high growth, since propane is not exactly a high-growth industry.
Most utility stocks are resigned to growing earnings-per-share at or near GDP growth. This will likely be the case for AmeriGas.
That being said, there should be at least enough growth to maintain the distribution. One way is through customer additions. AmeriGas added 39 customer accounts last year, and renewed 40 agreements.
In addition, the company is investing in its propane exchange program. It has expanded its presence in retailers and other customer-facing locations. AmeriGas boosted its cylinder exchange by an additional 1 million cylinders last year.
And, AmeriGas is pursuing growth through mergers and acquisitions. This is particularly true on the cylinder exchange side of the business, where the company conducted acquisitions last year adding 10 million gallons annually.
Thanks to these catalysts and the continued success of the business, AmeriGas expects to generate $660-$700 million of EBIDTA in fiscal 2017. This should sufficiently cover its annual distributions.
As the largest propane distributor, AmeriGas dominates its industry. Its size and scale is a competitive advantage. It can leverage its scale thanks to its nationwide distribution network.
Source: 2015 Annual Report, page 3
The company operates in all 50 U.S. states, through its 2,000 distribution centers.
Such a strong operational network provides AmeriGas with steady cash flow each year. Even when weather becomes less favorable, the company employs effective inventory management procedures.
The falling price of propane last year hit AmeriGas by surprise, since 2014 saw a propane shortage. This created a great deal of volatility for the company.
In response to the shortage, AmeriGas boosted inventory to help meet demand. A sudden drop in the price of propane left AmeriGas with high-cost inventory.
However, the company successfully cleared through this inventory, and is on a path to grow earnings once again.
For fiscal 2017, AmeriGas expects to increase adjusted EBITDA by 25% at the midpoint of management’s forecast.
Valuation & Expected Total Return
AmeriGas units trade for a price-to-earnings ratio of 25. This is right on par with the S&P 500 Index, which also has an average price-to-earnings ratio of 25.
It seems AmeriGas is fairly valued. Investors should not realistically expect the valuation multiple to continue expanding.
As a result, future returns will be comprised mostly of earnings growth and distributions. It goes without saying that the distribution will make up the majority of future returns.
But this is not a bad thing—far from it. In fact, AmeriGas generated 12.2% total annual returns over the past decade.
A reasonable projection of total investor returns going forward is as follows:
- 2%-4% earnings-per-share growth
- 8.5% distribution yield
Excluding any expansion or contraction of the price-to-earnings ratio, AmeriGas unitholders could generate 10.5%-14.5% total annualized returns moving forward.
AmeriGas has a much higher yield than most utilities. A main reason for this is because it is classified as a Master Limited Partnership, or MLP. MLPs traditionally have high yields, as they pass along most of their cash flow in distributions.
While MLPs have proven to be a mine field over the past few years, AmeriGas has a sustainable distribution.
And, it could continue to raise its distribution on a regular basis, as its earnings grow.
With interest rates still near historically low levels, it is not easy finding a yield over 8% in the stock market. Least of all, from a company that can sustain the distribution. Often, such a high yield is an indication of a troubled business model.
However, AmeriGas should be able to maintain its distribution, and even grow its payout modestly.
It may not be an attractive pick for dividend growth investors. But it could have high appeal for investors that desire current income, such as retirees.