High yielding dividend stocks are the siren song of the market. Investors get these images of incredible compounding interest machines with cash payouts of 9%, 10%, or even more. Trouble is, many of those high yields are built on very shaky footing, and it's much more likely that investors will watch their money go up in smoke from a dividend cut.
Continue Reading Below
Even though the energy industry has seen a decent rebound from its lows in 2016, the industry is still littered with high yield investments that don't look like their payouts will last much longer. Two companies in particular that look to be in this situation are CVR Energy (NYSE: CVI) and Suburban Propane Partners (NYSE: SPH). Here's a run down as to why these high yield stocks don't look to be the place investors should be looking today.
Image source: Getty Images.
No cash coming in the door
If you were to simply look at CVR Energy's consolidated income statements, it would be reasonable to assume that things aren't going great, but it doesn't appear that the company's payout is under threat. The thing is, though, that CVR Energy's unique corporate structure with its subsidiary partnerships -- oil refiner CVR Refining (NYSE: CVRR) and nitrogen fertilizer manufacturer CVR Partners (NYSE: UAN) -- means that the company's 10% yield looks a little tenuous.
CVR Energy doesn't own any hard assets. Rather, it has a large ownership stake in the two subsidiaries that are set up as variable rate master limited partnerships. As variable rate partnerships, they pay out all cash available for distribution at the end of every quarter. The problem is, though, that neither of these two entities have paid out any cash in the form of a distribution for four straight quarters. As a result, CVR Energy has been forced to tap its own cash reserves to maintain its current payout.
Continue Reading Below
What's even more discouraging is that neither CVR Refining or CVR Partners expect to see a significant turnaround in their results any time soon. CVR Refining's management said on its recent conference call that refined petroleum product inventories have been building in recent quarters despite significant downtime for turnaround work at many refiners across the U.S. This means that the margin for refined products will remain low for a while and will prevent CVR Refining from throwing off cash. Similarly, CVR Partners has been struggling somewhat with the integration of its recent acquisition and the price for nitrogen fertilizers were at a 12 year low just a few months ago.
CVR Energy has about $385 million in cash in its own coffers, with another $350 million being held at its subsidiaries. There is enough cash on hand to pay its dividend for a little while longer, but the risk of a cut rises each quarter when it doesn't get cash injections from its subsidiaries
The cold that never arrived
The propane wholesale and distribution business is an interesting one for investors. On the one hand, it can be a very steady cash flow generator as there is little to no commodity risk -- propane costs are all passed on to the consumer. Also, the installed base of customers pretty much means there is a pretty steady flow of demand.
Here's the rub, though, it is an incredibly seasonal business that makes almost all of its hay in the winter months. So the success of the business is very much predicated on cold winters.
The 2015-2016 winter was one of the warmest on record, especially in the Mid-Atlantic where Suburban Propane Partners does much of its business. As a result, the company didn't even come close to generating enough cash to support its distribution to investors -- distributable cash flow was only 60% of the cash paid out. If this was a one off thing, then it may not have been the end of the world. The company had some cash reserves to tap to get through one tough winter.
Unfortunately, this past winter wasn't much of an improvement. According to the National Oceanic and Atmospheric Administration, temperatures from December 2016 through February 2017 were well above the mean temperature everywhere East of the Mississippi River based on its 122 years of data. This doesn't bode for Suburban as it prepares to report its first quarter earnings in the coming weeks. Another warm winter likely means that its cash generating abilities for the year will be significantly impaired and it may be forced to cut its generous 13.4% yield.
10 stocks we like better than Suburban Propane Partners
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Suburban Propane Partners wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of February 6, 2017