High Income From Grim Reaper
The overwhelming majority of master limited partnerships are involved with fossil fuels, and it has of course been a very bad 12 months for energy commodities, and in turn for most MLPs. But there is a fair number of MLPs outside of the fossil fuel space. Today I want to introduce one of these unconventional partnerships.
Early in my investing career, I made what ultimately turned out to be a very good long-term decision. I figured that as the Baby Boomers grew older, they would likely spur a boom in the pharmaceutical industry. Of course I wasn’t the first person to figure this out, but I did invest on the basis of that hypothesis.
I have had money invested in healthcare mutual funds for more than two decades, and even though I put my first dollars in just before an early biotech bubble burst in the late 1980s, the decision to invest long-term in healthcare funds was perhaps the best of my investing career.
About a decade after my first healthcare investments, I was telling a friend about my rationale for investing in the sector. He paused for a moment, and then said “I guess in 20 years you may want to think about moving some of that money into funeral homes.” My first thought was “My gosh that’s morbid,” but then I decided that maybe he had a point.
There were a total of about 76 million births in the U.S. from 1946 to 1964, the period usually called the “baby boom.” At present, about 99% of those Baby Boomers are still alive, but those numbers are projected to steadily decline over the next few decades.
Of course this means more business for the funeral industry. Not only does this mean more funerals, but it means more pre-sales to the Baby Boomers who plan ahead. While there are a number of trends affecting the industry besides the increase in the number of people dying each year (e.g., the number of people opting for lower cost cremations over funerals is steadily increasing), there is a way for MLP investors to invest in the space.
StoneMor Partners (NYSE: STON) is an owner and operator of cemeteries. As of Aug. 30, the partnership owned and operated 304 cemeteries and 102 funeral homes in 28 states and Puerto Rico. It is the only operator in this space organized as an MLP. Unlisted StoneMor GP LLC serves as the general partner of StoneMor Partners. StoneMor was founded in 1999 and is headquartered in Pennsylvania.
StoneMor divides its business into regional Cemetery Operations and Funeral Homes segments. The cemetery products and services include burial lots, lawn crypts, mausoleum crypts, cremation niches, and perpetual care rights; burial vaults, caskets, grave markers and grave marker bases, and memorials; and installation services for burial vaults, caskets, and other cemetery merchandise. StoneMor also provides receptacles for cremated remains and funeral home services, such as consultation, the removal and preparation of remains, and the use of funeral home facilities for visitation and prayer services.
StoneMor debuted as a publicly traded partnership in 2004 with 132 cemeteries and 7 funeral homes, and an Enterprise Value (EV) of $233 million. 2004 revenue was $89 million and operating profit was $29 million. Today, StoneMor has an EV of $1.2 billion, and for the most recent 12 months had revenue of $386 million and operating profit of $66.7 million.
For the quarter that ended June 30, revenue reached a record $80.8 million, a 13% increase from a year earlier. Production-based revenue during the quarter reached $107.0 million, an increase of 23% in a year’s time. Adjusted operating profit was $20.2 million, up 42% from the same period last year.
Distributable free cash flow for the most recent quarter increased to $19.2 million from $15.4 million in the prior year period. The increase was driven primarily by higher pre-need sales, which generated increased inflows to the merchandise trust fund.
StoneMor has been aggressive at making acquisitions since its IPO. It employs a disciplined acquisition strategy with specific target criteria for cemeteries and funeral homes. The company targets acquisition with multiples of 4x – 6x EBITDA.
Over the past year, as oil and gas prices plummeted, StoneMor units trounced the Alerian MLP Index (AMZ). StoneMor was also well ahead of the S&P 500 for most of the past year. Despite a steep correction that began in late July, StoneMor shares have still outperformed the S&P 500 over the past 12 months.
The same pattern holds over the past decade. StoneMor’s average annual total return outpaced the NASDAQ 100, and handily outpaced the AMZ and the S&P 500.
Following the most recent quarter, StoneMor increased the quarterly distribution by $0.01 per unit to $0.65/unit, or $2.60 on an annualized basis. StoneMor has increased the annual distribution every year since its IPO, and the latest payout translates to an annualized yield of 9.5%.
Most investors in the MLP space are looking for tax-advantaged income. Nearly by default, that means they are investing in the fossil fuel space, since that income just happens to generally derive from producing, transporting, processing, and distributing fossil fuels. But StoneMor Partners provides a good example of an MLP that is outside of the conventional MLP space. Those MLPs still provide tax-advantaged income, but have been largely untouched by the carnage taking place in the broader oil and gas markets.