Streetwise

Lauren Rudd

Sunday, April 17, 2011

You Need To Actively Manage Your Portfolio

The heated rhetoric from Wall Street each time the subject of regulation is raised represents little more than a reflection of greed and political bias. Those who complain bitterly that regulations only serve to suffocate the ability of the Street to operate in an efficient and competitive manner are espousing ignorance, are clueless, or fervently hope that you are.

Furthermore, the way the brokerage industry has treated the less informed individual investor over the years reminds me of what I pick up when I walk my dogs. To make matters worse, the once adhered to complacency resulting from a conviction that the share prices of quality companies are destined to rise in the long run, despite the shifting sands of time, is extinct.

Therefore, you need to actively manage your investments and not be bashful about implementing a tactical asset allocation strategy that adheres to taking a portion of your profits off of the table when appropriate. In deciding such an investment strategy, a strong dividend yield is certainly a preferential avenue of choice. At the same time, the potential for capital appreciation, sans dividends, can at times make for a compelling story.

One company that provides both is Suburban Propane Partners LP (SPH), a company that services the energy needs of over 800,000 customers. Although technically a publicly traded master limited partnership, its units trade just like equity shares and have an enviable record of both capital appreciation and dividend yield.

When I last wrote about Suburban a year ago, my 2010 earnings estimate was $3.60 per unit, with a 12-month target unit price of $52, for a potential capital gain of 6.5 percent. In addition, there was an indicated distribution (dividend) yield of 6.8 percent. Although earnings came in a bit lighter than I expected at $3.36 per unit, the units recently closed at $55.15, exceeding my target.

Looking at the most recent price performance it is immediately apparent that the unit price is down a bit over the past month. The primary reason is the weather, which was warmer than average during the first quarter thereby resulting in less propane usage.

Nonetheless, revenues during the first quarter were $328.3 million, an increase of 8.9 percent over the same period a year ago. The increase was primarily due to higher retail selling prices associated with higher commodity prices, with some resulting from lower sales volumes.

As a result of the rise in commodity prices, Suburban reported realized losses on derivative instruments used for risk management that were not fully offset by sales of physical product and therefore negatively impacted overall gross margins.

Cost of products sold in the first quarter of fiscal 2011 also included a $1.6 million unrealized (non-cash) loss attributable to the mark-to-market adjustment for those derivative instruments. 

At the same time, operating, general and administrative expenses were 5.6 percent lower than a year ago, while depreciation and amortization (non-cash) expenses increased 15.5 percent, primarily due to the impact of prior year acquisitions.

Once again, Suburban has funded all working capital requirements with cash and ended the first quarter of fiscal 2011 with a cash position of $115.6 million. On January 20, Suburban increased its quarterly distribution (dividend) from $0.85 to $0.8525 per Unit, resulting in an indicated distribution rate of $3.41 per Unit.

Despite being a Master Limited Partnership, it is possible to approximate Suburban’s intrinsic value if care is exercised. In this regard, the intrinsic value of the units using a discounted earnings methodology with a 9 percent earnings growth rate and a 12 percent discount rate is $62 per unit. The more conservative free cash flow to the firm model yields a value of $86 per unit.

My earnings estimate for 2011 is $3.65 per unit with a 12-month projected unit price of $60 for a 9.10 percent gain. There is also a 6.10 percent indicated dividend.