StoneMor Partners L.P. (NYSE:STON) was the latest master limited partnership (MLP) to shock investors with a distribution cut (learn about the main risks of investing in MLPs here).
After increasing its distribution each year since 2005, Stonemor announced last week that its third quarter distribution would be reduced by 50% to 33 cents per share.
Even worse, StoneMor’s stock collapsed 45% on Friday.
Many dividend investors are wondering how this happened, especially after management’s comments about STON’s distribution less than three months ago on August 5th:
“We are encouraged by the positive metrics we’re seeing from our recent sales initiatives and when combined with lower operating expenses, will allow us to continue providing attractive distributions to our unit holders.”
StoneMor’s Chief Financial Officer also noted in August that StoneMor’s cash distribution coverage ratio for the last quarter was a reasonable 1.3 times.
Let’s review some of the warning signs StoneMor gave off prior to announcing its distribution cut and whether or not the stock could provide some value to high income investors going forward.
StoneMor Business Review
Before analyzing the distribution cut, let’s quickly review StoneMor’s operations. StoneMor was formed in 2004 and is the second largest owner and operator of cemeteries (317 locations; 81% of revenue) and funeral homes (105 locations; 19% of revenue) in the United States.
StoneMor’s products and services are sold when someone passes away (“at-need”) or ahead of time (“pre-need”) and include burial lots, caskets, headstones, memorials, and various installation services. The company is an MLP and does not pay any federal income tax.
Many income investors were attracted to StoneMor for several reasons. For one thing, StoneMor’s management team had rewarded investors with distribution increases every year since the company started paying one in 2005 (learn about Dividend Achievers, companies with 10 or more straight years of dividend growth, here).
StoneMor’s line of business was perceived to be very stable. Few new cemeteries are developed these days, capping industry supply. Nobody wants to live next to a new cemetery, and most cemeteries are owned by small companies or families (i.e. not the most aggressive competitors and plenty of acquisition opportunities).
Industry demand trends looked appealing at first glance, too. As the popular James Bond novel is titled, “Nobody Lives for Ever.” When coupling our mortality with America’s aging population, StoneMor seemingly had good visibility into its future revenue.
What went wrong, and could investors have known?
StoneMor’s Distribution Coverage was Fragile to Begin With
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. StoneMor’s dividend and fundamental data charts can all be seen by clicking here.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.