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Most investors associate master limited partnerships, or MLPs, with oil and gas companies. Indeed, energy firms are typically the ones that utilize the MLP model. Many investors might be wary at the very sight of the acronym “MLP.” That’s for good reason. The brutal collapse in oil and gas prices over the past two years caused share prices across the MLP asset class to crumble – and took dividends down with it.
But StoneMor Partners LP (NYSE: STON) is an MLP that has nothing to do with oil and gas, or the energy sector more broadly. StoneMor owns and operates cemeteries and funeral homes in the United States. It also offers a host of other related products and services including caskets and urns.
StoneMor has a lot to offer income investors. Not only is its business focused on one of life’s inevitable certainties, but it rewards investors with a huge 10% MLP yield.
StoneMor’s Stable Business Model
There isn’t a lot of risk that StoneMor will suddenly see its business model vanish due to an unforeseen structural change. After all, while immortality is an entertaining theory in movies and television, it’s not likely to happen any time soon.
And StoneMor has produced steady growth from its acquisition strategy, which is to use the cash flow produced by its existing properties to acquire additional properties, which then throw off their own cash flow. This creates a nice snowball effect of sorts.
To that end, in the fourth quarter of 2015, StoneMor acquired an additional cemetery and two more funeral homes, which brought its property count to 307 cemeteries and 105 funeral homes. Acquisitions are likely to accelerate going forward. Management noted in its fourth-quarter earnings call that it is evaluating potential opportunities above its typical annual rate.
This helped StoneMor realize record revenue last year. GAAP sales grew 6% to $305 million in 2015. Adjusted EBITDA and its cash available for distributions rose 7% and 3%, respectively.
StoneMor’s growth, while unspectacular, was more than enough to cover its hefty distribution. The company generated distributable cash flow, a key metric for MLPs, of $82 million last year, above the $77 million in cash distributions paid.
Going forward, StoneMor has plenty of opportunities for growth. The company will continue to purchase properties at an accretive rate for unitholders. StoneMor ended the year with a $609 million order backlog, up 12% from the same point the year before.
Huge Distribution Appeals to Income Investors
In today’s environment of historically low interest rates, income investors are in a tough spot. The stock market sits close to record highs, and traditional income sources like bonds or certificates of deposit offer tiny yields.
That’s why StoneMor’s 10% yield is so attractive. The company has paid 45 consecutive quarterly distributions.
And, this is a company that grows its distribution steadily over time. It has increased its payout by 3% compounded annually over the past five years. While that is not a huge growth rate, it nevertheless exceeds inflation, and a 10% starting yield makes up for less-than-optimal distribution growth.
While death-care services certainly aren’t the next hot growth idea, StoneMor should see solid demand for many years. After all, the U.S. is an aging population. The baby boomer generation is the largest demographic segment in the country, with millions of people entering retirement every year.
That should provide StoneMor enough room to continue increasing revenue, distributable cash flow and distributions for the foreseeable future.
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