by Travis Johnson, Stock Gumshoe | May 23, 2014 11:42 pm
We’ve written some in these parts about the many, many predictions of a US dollar collapse and an associated economic and societal collapse — recent newsletter pitches that spin this “doom” story have come fast and furious from Porter Stansberry and several others, and they are a pretty popular stock in trade in the world of investment newsletter marketing … though Porter did raise the bar considerably with his huge (and probably extremely successful) marketing investment in the “End of America” video promotions that he started to run several years ago.
That doesn’t mean that the predictions of doom are wrong… just that we’re well reminded that they are marketing. They are selling the fear of what might happen, and the fear of being unprepared or missing out. These pundits may well actually believe that the worst will happen, or that the trend for the US economy is bad enough that something very bad is very likely to happen, and they might even be right… but the wording and the emotional drama of the ads are simple advertising. And it works. I get worried when I read these ads or listen to the presentations.
I don’t sell all my stocks and put my IRA into gold and buy a citizenship in St. Kitts and Nevis or an estate in Nicaragua or Argentina because I fear the US will descend into chaos… but I do worry.
And there are very reasonable, mainstream things that people do every day to protect their savings against confiscatory governments or future inflation or currency devaluation… and, of course, reasonable things that every family can do to protect themselves from disasters both natural and man-made.
And really, if you subscribe to most of these newsletters I expect that’s going to be the advice that you will actually receive… be prepared, but don’t sink all your money into gold or guns or cans of beans in the basement and don’t stop thinking about ways to grow your net worth in the stock market. The disaster prognosis sells books and tries to kick-start some “outside the box” thinking, and there’s probably nothing wrong with that unless you get overwhelmed by the fear-based marketing, but meanwhile the newsletters these folks write and sell continue to recommend various types of real, mainstream investments that you can trade on the stock market.
So sure, as far as I’m concerned I think folks should feel free to buy an air horn to protect yourself from burglars, or buy a little farmland in the country if that’s feasible for you and you think you’ll need to plant beans to survive, keep an emergency kit and some supplies like most folks started doing after 9/11… and heck, if you suffer from the greatest fear of the wealthy, that your savings will be confiscated and you’ll be in the same boat as everyone else, feel free to buy that yacht to get you out of the country, and that home in Panama, and that overseas bank account (make sure to report it to the IRS). But most people can’t afford those things, or would be pretty minimally protected by having $10,000 of their savings in a bank in Canada or Panama.
It is very easy to go beyond reasonable preparation and bring yourself to the edge of panic — particularly if you’re also angry at the stock market, or at big business or the banks, or at the government or our elected leaders. Panicked people don’t make smart or well-timed choices very often, but they do buy newsletters and freeze-dried beef stroganoff and, apparently, collectible silver coins if the ads I’m seeing are any indication. I think there’s plenty of reason to worry that people might be shocked by some future economic downturn, whatever the cause, but I also think people who spent hours and huge amounts of psychic energy worrying about how to get some money out of the US would have been better off figuring out how to save more money and focusing on diversification. Better, I think, to deal with the crisis we know we have, a population of people who, on average, expect 30 or 40 “golden years” of retirement but haven’t saved nearly enough to live that retirement. Panic a little less, diversify, and save a lot more.
I love diversification. I like diversifying so that my stock portfolio isn’t dependent solely on the US economy and includes a large weighting in companies who operate elsewhere or globally and own “real” hard assets or valuable and irreplaceable businesses (though to some degree that diversification has been a drag on my portfolio in recent years), I like diversifying so that my savings is not solely in US dollar bank accounts (largely with physical precious metals and with foreign currencies, though I don’t currently hold any foreign currency CDs as I often have in the past)… but I don’t fool myself into thinking that I will know when the stock market is going to have its next crash, or when the dollar will reverse course and lose value against hard assets or other currencies. I do think the US$ will lose value over time, but that’s like saying that water will run downhill — the dollar has almost always lost value over time, though often very slowly. That’s why people invest their money instead of sitting on it. Recent blowouts in the amount of government debt, and expected weakness in the US economy as we hit the demographic morass of the Baby Boomer retirement, are obviously frightening and largely unprecedented… and it is especially difficult to calculate the impact US debt and unfunded obligations might have on the currency because the world has never been as interconnected and interdependent as it is today.
The US must logically be nearing the end of the currency “free ride” that we’ve enjoyed by lending people money in a currency that loses value over time, and that we control the issuance of, but demand is still extraordinarily high for the dollar and for US assets and, yes, for US debt. It is ridiculous that people are willing to lend money to our very broke government at less than the average historic rate of inflation… but it has been ridiculous for a long time. The original “End of America” video from Porter came out in the Fall of 2010, if memory serves, suggesting farmland, gold and silver coins and foreign bank accounts among his protection ideas as the US dollar loses its status as the global reserve currency, more or less the same kinds of “escape from the dollar” things he and other pundits have typically suggested more recently. Those are not necessarily crazy ideas, in moderation, nor is there any reason to avoid diversification, but there is a substantial opportunity cost when you go beyond diversification and let panic send you “all in” on your “escape from the dollar” plan. If you had put all your savings into gold in late 2010, for example (not what Porter was suggesting, to be clear), you would have lost about 10% on that position to today… not so bad as a hedge… but you would have also missed out on the opportunity to have made a 20% gain by holding long term government bonds during that time, or 50% by holding a broad basket of stocks like the S&P 500.
But with that in mind, I was flipping through recent ads forwarded by readers and I ran across Martin Weiss, one of the folks who warned of doom during, before and after the last crash, and his Safe Money Report... and whaddya know, in addition to the pitch to subscribe to learn about “The Deadliest Bubble in 237 Years: Protect Yourself and Profit,” we were told that we could learn about what Mike Larson, who edits Safe Money now, is calling “the ‘perfect’ stock for today’s low-rate environment.”
So I wanted to learn what that was. And tell you, of course. Here’s how his latest email draws us in:
“Is there such a thing as a “perfect” stock? Probably not. Every company on the planet has some hair on it….
“But in today’s market environment, I think I’ve found the closest thing to a perfect stock there is.”
Then we get the reasons why he thinks it’s a “close to perfect” stock today …
First, he says it’s breaking out — he shows a chart and shows it moving above resistance levels, and thinks it could break out… it was apparently near $20 a year ago and recently broke above resistance and took out the March highs near $25 to hit $26+, he says it could get to $30 and beyond “before long.” So that’s a clue.
He also tells us that it’s a MLP (that’s a Master Limited Partnership, FYI, yield-focused pass-through equity investments that typically own energy-related assets like pipelines), and that it currently yields “almost 8%” — which would mean it’s among the higher yielders, the MLP index yields a little less than 5% these days (though even some “blue chip” names in MLPs still carry high yields, including Kinder Morgan Partners at 7.2% … that’s not the stock he’s teasing, by the way).
“Third, it’s not some high-risk company in a high-risk industry like biotechnology. Nor is it doing business in some far-flung country vulnerable to surging inflation, geopolitical chaos, massive currency fluctuations or any number of other threats.
“It’s a company whose products you probably use, and whose employees and vehicles you probably cross paths with every week. Heck, our new neighbors own a catering business and they’ve just become customers of this firm.”
Huh… hard to imagine a pipeline company having direct customers in a catering business… or enough vehicles that you’d frequently run into them. Color me intrigued.
“If you compare this stock to the average company in the S&P 500 over the past three years, you get an adjusted beta of only 0.68. That’s a fancy way of saying for every 1 percent move in the S&P 500, this stock typically moves a little less than 0.7 percent.”
“… it’s levered to one of the strongest sectors in today’s market. I’m talking about energy, and more specifically, domestic energy. And finally, it’s rated “B” – or “Buy” by the Weiss Ratings system.
“I first recommended this stock to my Safe Money Report readers back in March. They’re already sitting on open gains of 11.15 percent, including dividends… I believe this move is just getting started!”
So what is our risk-averse Safe Money Report pundit recommending today? Thinkolator sez this is… Ferrellgas Partners (FGP), a propane distribution company.
If you’re not in certain pockets of country where home heating with propane is more prevalent, particularly rural areas, you might not realize just how much propane gets shipped around and used every day. Much of the country only thinks of propane when it comes to the grill in the backyard, but it’s a pretty popular home and commercial fuel in many areas and has pretty substantial demand in agriculture and transportation. We’re propane customers here at Castle Gumshoe, too, getting heat, hot water and sometimes electricity from a big ol’ propane tank that’s filled by a local delivery truck a few times a year.
It’s those trucks, and the distribution centers that feed them, that are owned by Ferrellgas Partners, which became an MLP about 20 years ago and does indeed yield close to 8% (the stock is just tickling $27 today, the yield is at 7.6%). Ferrellgas started in Kansas and has had a long history of acquisitions in the propane business to become one of the biggest players in an industry that’s still pretty fragmented (we have half a dozen family-owned oil and propane distributors in my area, the kinds of companies that have been swallowed up for decades by larger players like Ferrellgas, the larger AmeriGas Partners, and others). It also has probably the strongest consumer brand in the propane space, in addition to their wholesale and retail distribution of propane they also own the Blue Rhino tank-swap business (that’s for propane grills and patio heaters and such) and a small related business in grills and outdoor equipment.
There are several MLPs in the propane distribution space — they have often not gotten the respect of MLP investors to the degree that pipeline owners and midstream processing plant and refinery companies have, since their assets tend to consist largely of trucks and tank farms and those have less of a “monopoly” than many pipelines, but they do generally, over the long term, have the same kind of “utility-like” stability as, well, pipeline MLPs and utilities. And also like pipelines, they get massive depreciation charges that they can effectively use to pay out a lot more than their earnings — that cash flow is not technically earnings, since it’s been entered in the books as a depreciation charge as their trucks and other equipment age, but they don’t necessarily need it for operations because depreciation tends to overstate the cash cost of maintaining and replacing equipment, so they pay it out as “return of capital.”
That’s really the “magic” of MLPs, that the best of them are able to pay out a consistently high level of return of capital without hurting their equity value, and that return of capital simply goes to lower the investor’s cost basis in the shares… meaning it’s not taxable income until the shares are sold. Pipelines do this better than trucks, since they last longer and generally should cost less (as a percentage) to maintain, but the propane companies benefit from this same aspect of the MLP structure.
AmeriGas Partners (APU) is the biggest player in the propane distribution business, a bit larger than Ferrellgas and the similarly sized Suburban Propane Partners (SPH), and the three of them are really the only national players who are active in most states. All three have yields of about 7.5% and are really valued as yield plays. NGL Energy Partners (NGL) is also quite large and does more than just propane, but is also very regional and carries a yield a bit over 5%, and the only other one I’m aware of is Star Gas Partners (SGU), which is much smaller (also a yield of around 5%).
Ferrellgas looks like a pretty solid company, it gets decent returns on investment and seems able to handle its considerable debt load and has done a very good job of pushing out their debt maturities so they don’t have anything to worry about on that front for six or seven years, they continue to have the cash available to expand (they just expanded into the midstream business a bit, buying a water services company in the Eagle Ford in a bit of a departure from their core business) and now pay lower interest on their debt… and Ferrellgas has reliably paid their 50-cent quarterly dividend for over a decade.
But that also is part of the problem. Ferrellgas has paid the same quarterly distribution since 1998, never growing it (if I slip and call the distribution a dividend, forgive me — they’re not dividends, and MLP shares are typically called “units” instead of shares, though for most investors the difference is minimal save for the slightly more complicated tax filing and record-keeping obligations of MLP unitholders). That means, in effect, that FGP has really gone up and down as an interest rate play — not too different from a bond that has a flat coupon. I haven’t seen any indication from Ferrellgas that they want to raise the dividend, and they’ve never done so, and that takes away almost any interest I have in a leveraged yield investment in this environment.
So if I were looking to buy into a propane company, I’d go bigger and look first at AmeriGas Partners (APU). Their operating metrics are quite similar to Ferrellgas in terms of profitability, but they have a long history of raising the distribution annually and a stated goal of increasing the distribution by 5% a year. That puts some pressure on them, and they are arguably not quite as conservative as Ferrellgas when it comes to the balance sheet… but in general, these two companies face the same external factors that drive their results (consumer and business use of propane versus natural gas, heating oil, kerosene or electricity) and the same weather and seasonality factors (both rely on their propane tank exchange business to provide some balance, since people refill their gas grills all summer when heating bills are low and it helps to counteract the impact of unusually warm or cold winters).
Given that, the quick scan of the numbers tells me that FGP looks like a nicely growing and solid family-controlled partnership that might be slightly more conservative and has a strong brand in Blue Rhino (they also have very large employee ownership, which is admirable)… but APU looks to me like a better stock. Sorry, “partnership unit.”
APU paid a distribution of $2.20 in 2004 and ended that year at about $30. It will pay a distribution this year of $3.52, and the stock is currently at about $47. That means increasing the payout by about 50% bumped up the stock price by close to 50%, though there have certainly been plenty of up and down times as the business has good or bad quarters, often weather related, or, more often, as interest rates and rate expectations have changed and investors have assigned a different multiple to the cash flow from APU.
FGP paid a distribution of $2 in 2004 and ended that year with a share price of about $21. It will pay a distribution this year, all indications have it, of $2 again as it has every year in between, and the share price is currently just shy of $27. That’s a gain of about 25% in the shares.
In both cases, reinvested distributions would have added considerably to the returns as they compound the impact of that yield over time… but a growing distribution compounds a lot better. And really, the key for me is that unless you have tremendous insight into the management or plans of a company, and good reason to believe that they will be operated markedly better than their competitors, buying income-focused equity in a company (or partnership, in this case) with no history of increasing the distribution/dividend makes sense only when that company is a lot cheaper than or has a much higher current yield than the competitor who has a long history (and a stated goal for the future) of increasing the distribution each year. Given that both APU and FGP are in much the same business, and I don’t really know any reason to think one is dramatically better than the other and will outperform (other than the stock price history, which tells me that APU has done much better in the past), it seems silly to buy Ferrellgas with a 7.6% current yield when you could also buy APU today with a 7.6% current yield.
Maybe you’ll look into this and find that APU has some nasty skeletons in their closet that I’ve not yet run across, or be worried about their somewhat more aggressive balance sheet. It’s not a huge difference from what I can tell — APU has meaningful debt maturities coming a few years sooner, 2018 mostly vs. 2020 and 2021 for FGP, and has grown more aggressively through acquisitions, including a large merger a couple years ago that expanded their share count considerably and pressured them a little bit, particularly when weather has been troubling in recent years (this past Winter was actually tough for all the propane guys not because demand was low, but because supply was low too and they had to spend more to deliver for customers) … but to some degree when you buy a company you’re buying management’s ability to manage through challenging periods and continue to deliver results to shareholders. For MLP unitholders, that means the distribution has to go up without causing undue stress on operations, and on that most important metric APU has been by far the stronger performer. We’ll give some benefit of the doubt to Ferrellgas with their recommendation from Safe Money Report, it’s possible that their analyst sees something brewing that will allow FGP to raise the distribution or has some insight into management’s plans — but by looking over recent presentations and their financials I’m hard pressed to come up with a good reason for a buy of FGP. APU is slightly more volatile than FGP, but both are far less volatile than the market… and FGP has a steadier payout history with that 50 cents/quarter for so long, but I’ll take “growing” over “steady” when it comes to dividends.
I haven’t really looked seriously at any propane names lately until this morning, but suggested a somewhat similar Canadian company called Superior Plus (SPB.TO, SUUIF on pink sheets) several years ago as a “bottomed out” yield play after it had slashed the dividend and got clobbered, which is a useful reminder that these kinds of companies can get into bad shape if they use too much debt to fund acquisitions or get too exposed to a cyclical industry (that one gradually recovered back to a reasonable price, doubling over a year or so, and became a less-interesting 5% yielder). If that happened to FGP, and they suddenly saw their shares crushed and were paying a 10% yield while competitors yielded 7%, well, that would be a different story and an opportunity for a turnaround.
And it’s worth remembering that propane distribution is, as a whole, a declining business. These companies all grow through acquisition, and the big three still have only about a third of the market between them so there’s a lot of potential acquisitions to come, but everyone in the business also knows that overall consumption of propane declines by a couple percent each year (thanks largely to improving energy efficiency, though there is also some switching, particularly to natural gas if the utilities happen to be investing in expanding their distribution networks). And it’s weather-dependent, and subject to supply booms and gluts like other commodities, so there’s always something to think about even though, as primarily distribution companies, the actual price — except when it’s so high as to really cut into demand — should not make a huge difference to their bottom line.
Suburban Propane (SPH), by the way, the other big player in similar business lines that’s also an MLP, has that same 7.6% yield and has also been growing the dividend — but for whatever reason has been quite dramatically more volatile than both FGP and APU. It’s always possible to learn more by diving beneath the numbers, but in sniffing out this teaser today and looking into the companies fairly quickly, the numbers that matter to me put APU clearly at the top for stability and growth, with FGP and SPH tied for second position depending on whether you put more value on distribution growth (SPH) or on lack of stock price volatility (FGP).
Your mileage may vary, of course, and I’m not personally interested in buying any of these at this particular moment… but I’d urge you — if you’re worried about inflation and a devaluing dollar and looking for protection from securities with solid assets and good yields — to consider that, all else being equal, a growing yield protects against inflation and a flat yield makes you a victim of inflation.
That’s my two cents for today. Have a wonderful weekend, and we’ll be back with more fun (and our next “Idea of the Month” idea, perhaps culled from the teasers that litter our inboxes each day) after the Memorial Day holiday.
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