Suburban Propane Partners, L.P. (SPH 1.30%) supplies propane fuel to its 1 million-plus customers across the United States. Propane is a by-product of natural gas processing and petroleum refining, and is used for everything from heating to industrial applications. With a history spanning almost a century, Suburban Propane first found success servicing and managing the fuel needs of middle-class Americans as they slowly moved from cities to the suburbs. Today, Suburban fuels not only the homes of its customers but thousands of businesses as well.
Suburban Propane has had a tough few years. Read on for a history of the company and how that plays into the situation it finds itself in today.
A history of fueling the suburbs
In 1928, Mark and Adele Anton began constructing a new home in suburban West Orange, New Jersey. It was during the building process that Mrs. Anton discovered there was no gas line access for homes in the area. As a solution, the family decided to install a propane tank for their home.
Image source: Suburban Propane.
The Anton family wasn't alone in their relocation to the suburbs, and Mr. Anton decided to install propane tanks for other homes in the area. The venture was a hit, and the Suburban gas company was on its way. As more and more middle-class Americans moved to the suburbs, the company was able to expand all the way down the Eastern seaboard, eventually purchasing the propane assets of Phillips Petroleum following World War II.
Suburban Propane's rise goes hand in hand with one of the great mass migrations in American history: the exodus from cities to rural areas. As we shall soon see, as this trend has slowed and in some ways reversed, so too have the company's fortunes. This is not to say there's no hope for Suburban. More recently in its history, through its Agway subsidiary, Suburban Propane has begun providing natural gas and electricity to customers in New York and Pennsylvania. Agway is essentially another provider option for residents in these states and is available due to state changes in energy regulation. Unfortunately, this segment amounted to just 5.3% of total revenue in third-quarter 2017.
What prospective investors need to know
Structured as a limited partnership, Suburban Propane pays out 90% of its taxable income as dividends. This has served investors well for years. Unfortunately, due to higher-than-average winter temperatures in the U.S. in recent years, Suburban Propane was forced to announce a planned cut to its dividend. The decision was announced on Aug. 3, 2017 to a market that was already expecting it. The company has failed to produce the profits necessary to maintain its dividend payout:
SPH Cash from Operations (Annual) data by YCharts.
In order to better predict future dividends, Suburban's executives plan to use a 10-year average of heating-degree days going forward.
Should you own Suburban Propane?
The jury is still out on the exact size of any dividend cut. Many analysts are calling for as much as 33% -- which sounds like a minimum given the stock's current yield of over 14%. However, once we get some clarity about the payout, dividend-focused Fools might find shares worth considering.
