Death, the Dutch Anomaly and Burgers — a Friday File Hodgepodge

By Travis Johnson, Stock Gumshoe, July 27, 2012

I’ve got a teaser pick or two to sniff out for you today for our Friday File edutainment, but first I thought i’d share a few thoughts on a couple of the other companies that have floated through these parts over the years.

The first one is StoneMor Partners (STON), which is a master limited partnership (MLP) that I featured as an “Idea of the Month” pick at around $15 a little over three years ago when it was a beaten-down yield play spitting out a great dividend. It’s always been a company that makes investors a bit nervous, partly because of the subject matter (they primarily own and operate cemeteries) but largely because of uncertainties about their accounting and their reliance on both prepaid funeral services and trust funds for perpetual cemetery maintenance.

STON went up so fast during the 2009-2010 market rally that before we knew it the shares had spiked over $30 and the yield for a while got down to the 6-8% neighborhood, so those who bought it managed to see some nice capital gains as well as collecting a couple dollars a year in distributions (I never did buy this one myself). In my annual reviews in those subsequent years I said I would be a lot more comfortable taking profits or setting a stop loss on the shares after those run-ups — they’ve been facing a problem with the fact that they rely on investment income for a fair amount of their book value and cash low, and with interest rates so low and still falling the income hasn’t exactly been great.

I won’t go into much detail on this, but in some ways STON relies on a kind of “float”, much like insurance companies do. In the case of insurance companies, the float is the money they’ve collected in premiums but that they don’t (yet) have to pay out to settle claims that might not come for decades. While they hold this float, they can invest it and any income on that investment is theirs to keep. Somewhat similarly, cemetery operators generally have two pools of long-term cash that’s regulated, but that they can use to collect investment income — the prepaid pool and the perpetual trust for cemetery maintenance. The first is cash that folks have put down to buy a cemetery plot and services that they might not use for ...

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