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Published: October 28, 2009
An often-overlooked industry may just be the
best place in the entire market to find steady income. Major
players are paying rock-solid yields as high as 7% to 10%.
When you think of energy companies, you probably think of oil
and natural gas. Or maybe you even think of alternative energy
such as wind, solar and nuclear. But another segment of the
industry altogether -- one that never makes headlines -- is one
of the best places to invest for income.
The business: Propane.
The propane industry isn't just the tank attached to your grill.
It's much more than that. Propane is big business.
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In 2007, propane accounted for nearly 4% of
total U.S. energy use.
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More than 14 million American families use
propane.
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About 80% of all farms in the U.S. use
propane to power equipment such as irrigation pumps.
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More than 10 million buses, cars and trucks
worldwide run on liquefied propane.
Propane, which is one of the cleanest-burning fuels, is also
used to generate electricity. Unlike natural gas, propane
can be easily stored and transported in liquid form, in which
it is 270 times more compact than gas.
Amerigas Partners (NYSE: APU) is the largest propane
distributor in the United States. The company sells about
one billion gallons of propane a year to 1.3 million
residential, industrial and agricultural customers. It has
600 locations in 46 states.
Why is propane better than any
oil or gas company? Propane has a
few key advantages.
The main advantage is the high
switching cost. Amerigas leases its
tanks to retail customers. In order
to switch to another propane
company, customers must eat the cost
of switching tanks, which usually
outweighs any cost savings. In
addition, natural gas often isn't
available in the rural communities
where propane is often used. A
switch to oil necessitates replacing
appliances.
This high switching cost give
Amerigas strong pricing power. As
demand has declined in the slower
economy, the company has been able
to counter the effects by raising
prices. Unlike most utilities, the
propane business is unregulated,
which give Amerigas tremendous
pricing flexibility. Overall, the
company has a stable customer base
and dependable revenue.
Just look at the numbers.
Net income for the company has
increased an average of +14% a year
for the past five years, and net
income is up +22% so far in fiscal
2009. And here's the best part: As a
master limited partnership, Amerigas
is required to pay out the bulk of
earning to its shareholders.
The company pays quarterly
distributions, which were recently
raised in April from $0.64 a quarter
to $0.67. At today's price, the
current yield is a solid 7.1%.
Amerigas has never cut the
distribution since it began in 1995,
and the company has raised the
distribution every year since 2005.
Management says the company intends
to raise the distribution +5% every
year.
A key measure of financial strength
and profitability for a company is
its return on equity. ROE measures
how efficiently a company can turn
shareholders' capital into profit.
While this number varies by
industry, a number of 20% or higher
is considered excellent. Amerigas
earns an astounding 58% ROE, at the
top of its industry.
One of the best things about
Amerigas is its prospects for future
growth. Even though the company is
the largest propane marketer in the
country, is still has just a 9%
market share with plenty of room to
grow. The business is highly
fragmented and Amerigas has been
able to gobble up smaller operators.
In 2008 alone, the company increased
its sales by about 20 million
gallons.
A high yield offered by a company
with a stable and growing business
is just what the doctor ordered for
today's uncertain environment.
However, given the fact that APU has
soared more than +35% so far this
year, investors might want to buy on
a pullback to $35 or below.
-- Tom Hutchinson
Staff Writer
StreetAuthority |
