Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
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What: Shares of Calumet Specialty Products dropped more than 17% in March. The drop was largely attributed to the announcements of a secondary offering of company shares and the move of CEO William Grube into a newly created job at the company.
So what: Here is one of the great challenges of owning variable rate master limited partnerships such as Calumet. The company provides variable rate distributions, which means that at the end of each quarter it distributes 100% of the available cash to shareholders instead of distributing a fixed amount. The upside of this policy can be the occasional huge payout, but a major downside is that the company cannot retain cash to grow the business.
That forces the company to either issue debt or equity to fund projects, and you can only issue so much debt. Calumet's debt position was getting a little to burdensome, so management decided to pay off some of those debts by issuing new equity in the company.
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There is also the question of the impact onthe company's future directionof Grube's move from CEO to become Calumet's executive vice chiarman. Grube and the company's co-founder, board ChairmanFred M. Fehsenfeld Jr., will both be on the board and will likely have large influence on where the company goes from here.
Now What: Additional equity in the company will ultimately lead to lower payouts per share unless the company can significantly increase its distributable cash flow. The company has more than $600 million in expansion and new construction projects under way, so there is a pretty good chance that this recent shareholder dilution will be a major distribution killer. Despite the miserable month, shares of Claumet Specialty Products have soundly beat the S&P 500 on a total return basis over the last 10 years; if it can execute on its expansion plans without diluting shares too much it should continue to do so.
The article Why Calumet Specialty Products Partners LP's Stock Crashed 17% in March originally appeared on Fool.com.
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