Anyone who's followed Suburban Propane Partners (NYSE: SPH) over the past year or so knew that a distribution cut was coming, but we just didn't know how much the cut would be. This most recent quarter, management announced the ultimate fate of its payout to investors and tried to give investors some hope that it will be able to navigate this string of tough years.
Here's a look at the company's most recent earnings results as well as why management thinks this payout cut will be the remedy for Suburban's wounded financial statements.
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By the numbers
I know it sounds strange to say this, but it's not that big of a deal when Suburban Propane -- or any other propane distributor -- reports losses this time of the year. In fact, you could even argue that the smaller year-over-year improvement in bottom-line results could be viewed as a significant positive. The propane business is an incredibly seasonal one where the company almost certainly runs losses in the summer months and covers the difference in the winter when residential and commercial heating demand is highest.
The slightly better performance this past quarter was attributed to higher volumes sold and higher prices for those sales. Management did note, though, that this fourth quarter was one week longer than last year's, which helped boost results for the quarter ever so slightly.
Looking at fiscal 2017 results, Suburban ended the year with a net income result of $37.99 million, or $0.62 per share. That's much better than the $14.4 million it posted in the fiscal year 2016, but that isn't too much of a compliment because 2016 was one of its worst years on record because of an extraordinarily warm winter.
Suburban Propane Partners isn't a company known for being in the news much, but the most significant news came last quarter when management elected to cut its distribution to shareholders by as much as 33%. In October, it announced that the new distribution level would be $0.60 per share starting this quarter, which ended up being the full 33% cut. The warmer winters in recent years have been brutal on the company's finances, and it was a matter of time before management made this move.
What management had to say
Rarely is a distribution cut a flippant decision, so CEO Michael Stivala wanted to make sure that investors understand why management elected to reduce the distribution to the level it did and what it should allow the company to do in the near future.
What a Fool believes
As much as current investors aren't going to be too pleased with the lower distribution payment, it was ultimately the right move for the long-term viability of the business. Even with the cut, however, investors are still looking at a distribution yield of 9.8%, so it's not as though this is an epic payout reduction.
The variable with all of this is if the weather will cooperate over the next couple of years. If winter months continue to get warmer, then propane demand will continue to decline and make it hard for Suburban to meet this reduced distribution payment. Management plans to cut costs and pay down debt to ensure the company is more able to handle tougher times, but that thesis could blow up without cold-enough winters.
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