Dividend Growth Analysis
Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
AmeriGas Partners’ Dividend Growth Score of 22 shows that the MLP is capable of some distribution growth, as seen by its impressive track record of 12 straight years of payout increases. The company has consistently increased its dividend by 4-5% per year over time.
Source: Simply Safe Dividends
However, the combination of a declining coverage ratio in recent years and a rising debt load means that being able to continue this rate of distribution growth may become increasingly difficult.
After all, AmeriGas is already America’s largest propane distributor and due to the secular decline in propane demand of around 2.5% per year, management will have to either find ways of further boosting its margins or finding enough acquisitions to keep its current sales, EBITDA, and DCF flat, much less growing at the same pace as the distribution.
The problem is that in a commodity business such as propane, there is a hard limit to how much the MLP can increase prices on customers before it risks losing market share.
So while AmeriGas is likely to continue to grow its payout for the next year or two, especially if management’s 2017 guidance of around $620 million in DCF proves true, the distribution growth runway for this MLP seems to be far more limited than with other, more stable kinds of MLPs.
Valuation
Because of how MLPs are structured for tax reasons, earnings and thus the P/E ratio are not the best valuation metrics to use. Rather cash flow and yield is what you want to focus on.
Despite a very strong past year, in which APU units have generated a 30% total return, AmeriGas is currently trading at 8.9 times trailing operating cash flow, which is 8% below its historic 9.7 mean P/CFO ratio.
However, given that MLPs are mainly owned for their high-yield, another way to see if one is over/under or fairly valued is to look at how the current forward yield compares to its historic norm.
For example, over the past 13 years AmeriGas’ yield has ranged from 5.5% to 11.3% (3), with a median value of 7.4%. From a price to cash flow and distribution yield basis, AmeriGas is trading at around an 8% discount to its historic norms.
Normally such discount might warrant investors opening an initial position, and then adding on dips. However, given the high-risk nature of the propane MLP industry in general, as well as the likely growth challenges AmeriGas is likely to face in coming years, I can’t recommend anyone but the most risk tolerant investors own this MLP, at any price.
Conclusion
Don’t get me wrong. As far as propane MLPs go AmeriGas Partners, L.P. (NYSE:APU) is by far the best one that long-term investors can own, with the strongest balance sheet, the best management team, and the most secure payout.
That being said, I generally don’t advise investors allocate their capital to industries in secular decline. If you are comfortable with the risks inherent to this industry and want to own a small stake in AmeriGas Partners as part of a well-diversified dividend portfolio, you may want to wait for a more attractive price so that the risk/reward ratio is more heavily tilted in your favor.
However, I don’t have any interest in owning the partnership in our Conservative Retirees dividend portfolio.
Disclosure: None
Additional Links:
(1) http://www.lpgasmagazine.com/defining-the-state-future-of-the-propane-industry/
(2) http://www.simplysafedividends.com/ferrellgas-partners-fgp-dividend-cut/
(3) http://www.gurufocus.com/term/yield/apu/Dividend%2BYield/AmeriGas%2BPartners%2BLP
