Ferrellgas Partners (FGP): Another Lesson on Dividend Safety

I get a lot of questions about master limited partnerships (MLPs) when it comes to the topic of dividend safety.

Many dividend investors are attracted by the high yields and steady cash flows offered by MLPs.

A number of these businesses have paid uninterrupted dividends for decades as well.

However, like any industry, not all MLPs are created equally. Some are better-capitalized and more effectively managed than others.

As readers know, I consider myself to be a conservative dividend investor. I like simple businesses with time-tested operations, consistent free cash flow generation, reasonable balance sheets, and sensible management teams that have shown a commitment to paying dividends.

It’s true that a handful of MLPs possess these traits. Magellan Midstream Partners L.P. (NYSE:MMP) and Spectra Energy Partners LP (NYSE:SEP) are two examples that come to mind.

However, many MLPs possess risks that make me a bit uncomfortable. You can review some the key risks here.

Ferrellgas Partners LP (NYSE:FGP) was the latest MLP to rock investors. The company’s stock has fallen over 50% since the end of August, including a plunge of 41% since last Tuesday when it reported earnings (1).

Management also indicated that the company’s distribution would likely be cut at least 50% in the next quarter, although no official announcement is expected until early November.

Ferrellgas is the second largest retail distributor of propane in the country and is well-known for its Blue Rhino grilling tanks. The company also has some midstream operations engaged in crude oil logistics.

Its mix was 100% propane in 2014 and was targeted to be split 50/50 between propane and midstream operations by 2018.

Source: Ferrellgas Factsheet

The company has been in business for more than 75 years and paid uninterrupted dividends since it went public more than 20 years ago.

Such dividend longevity appeals to almost any conservative dividend investor, but it is not the only factor that impacts dividend safety.

Let’s take a closer look at the factors that resulted in Ferrellgas Partners LP’s slump and pending dividend cut. Understanding how Ferrelgas destroyed shareholder value can help us learn what to watch out for with future investments.