“A Big Yield Hunter’s Dream Pick” (Roger Conrad)

By Travis Johnson, Stock Gumshoe, July 26, 2011

Here’s the promise from Roger Conrad, in a teaser ad for his Big-Yield Hunting newsletter:

“11% Yield… AND a 27% Profit Gain, Too!

“It’s a Big Yield Hunter’s Dream Pick. Bad news baked into the price… a sustainable high yield… and a big price surge right around the corner!”

And I gotta tell you, that sounds pretty frickin’ enticing in these uncertain times — “sustainable high yield” just has a nice ring to it. So what’s he teasing us about?

Propane, mostly. This is apparently a company in the propane distribution business, which has long been a steady eddie business for some Master Limited Partnerhips (MLPs) that have gradually started to consolidate the still-very-fragmented US propane distribution and delivery business.

But it sounds like this isn’t an MLP — you can find MLPs with 11% yields, but they’re not the steady propane or pipeline groups, the most reliable of which tend to have distribution yields in the 5-8% range these days. So who is it?

Here’s the rest of our cavalcade of clues:

“This company is in the propane distribution business, and margins are pretty strong—about 40%. First-quarter 2011 numbers are looking way better than a year ago.

“It’s also in the specialty chemicals business, and its earnings actually grew 56.5% in the fourth quarter of 2010. I see a lot of value here, and the market simply overreacted to the dividend cut.

“I hope you won’t do that… because you now have the rare opportunity to tuck a real gem into your big yield portfolio. One that sports an impressive 11% yield and could easily see a 27% gain in 2011.

“Now its energy services division accounts for a lion’s share of the revenue. It’s definitely the workhorse. But the little show pony right now is its specialty chemicals division. It delivers chemicals needed in the pulp and paper industry, fertilizers and water treatment facilities, just to name a few.

“In fact, it’s the second-largest manufacturer of a number of these vitally-needed specialty chemicals. Management’s recent decision to expand production facilities is proving to be a very profitable one and sets the company up for greater profits in 2011 and 2012.”

Roger Conrad tells us that this is a stock that has “bottomed out” and that this is a great buying opportunity while the stock is down, with potential for capital gains to go along with that 11% yield.

So who is it? Well, I threw all that info into the mighty, mighty Thinkolator. It required a bit of rejiggering of the internal compass, because this pick is actually North of the border … but today Conrad is teasing … Superior Plus (SPB in Toronto, SUUIF on the pink sheets).

Superior Plus was, like many high-income Canadian investments, a trust — but unlike most of them, it converted to a corporation a couple years ago, on December 31, 2008, well before the trusts lost their tax protection. They do indeed distribute propane, though that’s not all that they do.

Superior is the biggest propane distributor in Canada, and has over the last couple years been expanding and trying to build up the Eastern Canada and Northeastern US businesses, mostly in propane but also in heating oil distribution and other energy services. They also do operate a specialty chemicals business, which includes US and Canadian assets as well as a production plant in Chile, and, a bit less sexily, a large North American building products business (construction materials like ceiling panels, and their own brand of insulation). For many years a bit more than half the profit has come from the energy distribution business, and that hasn’t changed — it has actually gotten more pronounced lately, so we’re now seeing more like 60% from energy distribution and 30% from chemicals, with the construction products and distribution business almost becoming marginalized in the last year or so thanks to the awful construction environment.

And yes, Superior Plus did cut their dividend when they announced the 4Q 2010 earnings — you can pick the date pretty easily on a chart, that was the day in February when their share price dropped by about $1.50. They’ve actually had several similar trading days in the last year, with some big spikes and collapses in the share price — I haven’t researched them all, but I would assume that they correlate with past earnings disappointments or projections.

This is a corporation, but it’s also true that they operate much more like an MLP or a trust — they consistently pay out far more in dividends than they earn as “accounting earnings” (meaning, after all the non-cash charges like depreciation, etc.), and they appear to base their shareholder dividend payments on their adjusted operating cash flow.

In that regard, they ought to be able to keep up the divvies — in cutting the dividend they also projected that they this adjusted operating cash flow number would come in between C$1.40 and $1.75, which means they ought to be able to sustain the dividend at the current rate. The current dividend is 10 cents per month, so C$1.20 per year — and yes, that does give us a yield of almost 11% on the current C$11.12 share price (OK, 10.7% if you want to be a non-rounding stickler).

And they see to want to continue to operate this way, here’s the verbiage from that same report when the dividend was cut:

“Superior is committed to paying out a substantial portion of free cash flow to shareholders and remain a high yield corporation. We have conservatively assessed our cash flow, capital requirements and balance sheet requirements in establishing this new dividend level.”

The things that caused them to project lower income and lower that dividend are principally a weak US housing market that’s cutting even further into their construction products and distribution business, and higher oil prices that are cutting demand for their energy products (remember, they’re mostly a distributor — they get a fee that’s probably largely volume-driven regardless of the price of oil or propane, but folks tend to turn down the thermostat and buy less when prices are high).

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