Sunday, March 16, 2014

Recent Buy: APU

Mar 14, 2014: Bought 120 units of APU at $42.27 per unit.

AmeriGas Partners, L.P. (APU) is a publicly traded master limited partnership (MLP) and the largest U.S. retail propane distributor. It conducts business through its principal operating subsidiary AmeriGas Propane, L.P. Revenues come from five retail markets: residential, commercial/industrial, motor fuel, transport, and agriculture. APU also earns income from wholesale customers.

require a premium yield of at least 6.75% when purchasing units in MLPs and limited liability companies (LLCs). The reason is that ownership requires special treatment at tax time, which I'm only prepared to do if I can earn a great yield. APU certainly offers a great yield – my starting yield on cost is an impressive 7.95%!

When buying units in MLPs and LLCs, I allocate double the normal amount of $2,500 to each purchase. (Compare with my buys of ETP and VNR). Eventually, when DivGro is fully diversified, I'm planning on adding capital to existing holdings. Again for tax reasons, I don't want to overly complicate my tax reporting for MLPs and LLCs, so I see these double allocations as pre-buying those additional units...

APU pays a quarterly distribution of 84¢ per share in the months of February, May, August, and November. The partnership has been increasing its distribution every year for 9 years running.

Over the past 10 years, APU's price has increased by 45%, which trails the corresponding increase of 64% of the S&P 500 by 19%. However, notice that APU has only recently started trailing the performance of the S&P 500. In 2009 and 2010, APU significantly outperformed the S&P 500.


Analysis of APU


My fair value estimate for APU is $46.05, so I picked up units at a discount of about 9%, not quite the 10% discount I like to see for MLPs. The following table provides some key statistics for APU, with highlighted values relating directly to my MLP selection criteria.


APU meets the requirements of the Chowder Dividend Rule, which requires that the sum of a stock's dividend yield and its 5-yr dividend growth rate exceeds 12%. For APY, the sum is 13.54%. Additionally, APU meets the following of my MLP selection criteria:
  • Return on equity exceeds 16% ( 22.2%)
  • Price to earnings ratio (P/E) is less than 20 (TTM is 17.99; forward is 15.69)
On the other hand, APU falls short on these criteria:
  • Debt to capital ratio is below 67% (174%)
  • PEG ratio is less than 2 (2.82)
  • 5-yr CAGR is at least 7% (5.59%)
APU has increased its distribution steadily over the last 9 years.


APU passes 6/10 of my MLP selection criteria and earns 5 stars: (*******)

Other ratings for APU


 Zacks Rating  3 Hold
 Thomson Reuters StockReport+   (8/10)
 The Motley Fool's CAPS Rating  (*****)
 MorningStar Rating (*****)
 S&P Capital IQ's Stock Report (*****) Hold 

Concluding Remarks


APU is attractive because it offers a spectacular distribution yield and a solid distribution growth rate.
APU falls in the Utilities sector, which increases DivGro's diversification.

I believe that when company officers make major stock buys, investors should take notice. In the month of February, three of APU's directors bought units of APU. President and CEO, Jerry E. Sheridan, bought stock worth $501,771, while CFO Hugh J. Gallagher and Director K. Rick Turner bought stock worth $127,198 and $103,564, respectively.

As the largest propane distributor in the U.S., APU has an advantage over rivals like Suburban Propane (SPH) and Ferrellgas (FGP) in gaining more supplies during winter shortages. APU should benefit from rising demand and higher prices, which will pad its margins and strengthen its near-8% yield.

Not everything is smooth-sailing for APU, of course. The propane market is quite fragmented and the barriers to entry are low. APU has many competitors, in the propane market and from other energy suppliers. Furthermore, consumers are making an effort to conserve energy, especially when energy costs rise. When milder temperatures prevail, demand for energy drops and hurts companies like APU. This winter, though, with polar vortices bearing down on most of the U.S., APU should do well!

120 shares of APU adds $403.20 of expected distribution income, increasing DivGro's projected annual dividend income to $3,399.48.

APU replaces SJR as the 26th stock in DivGro.

Full Disclosure: Long ETP, VNR

Thanks for reading! Do you own units of APU? How about other MLPs or LLCs? 

2 comments :

  1. Obviously the double buy doesn't hurt, but $400 of additional distributions in one fell swoop! Currently, I only hold OKS as far as MLPs go, and am up in the air as to how long I'm going to hold it.

    With publicly-traded partnerships (PTPs), you are limited in your ability to recognize the losses on an annual basis. Certainly you avoid any income taxes on the distributions, but can end up with a fairly significant loss carryfoward only applicable to the same partnership. Food for thought, although if one has a holding period of forever, does this inability to take the loss really mean much? Perhaps not.

    ReplyDelete
    Replies
    1. OKS would not currently make my cut -- I require 6.75% as "payment" to deal with the K-1 schedule complexity at tax time.

      Yes, the loss carry-forward issue is one concern. Hopefully, I wouldn't have to face that issue :-).

      Another issue is that some PTPs label portions of distributions as return of capital. Holding for a long time could conceivably get you to a point where all capital is returned -- and change the taxation scenarios.

      Thanks for your perspective!

      Delete

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