Two Rich, Safe Partners Worth Having

04/11/2011 2:19 pm EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

Suburban Propane and Sunoco Logistics provide solid yields and restful nights, writes Jack Adamo of Insiders Plus.

I’m heavily overweight in master limited partnerships (MLPs), because as notorious robber Willie Sutton reputedly observed about banks, “that’s where the money is.”

For now the market looks like it wants to run, so I want to be fully invested while it does. The whole MLP group is near historically high valuations, but considering the overall steadiness of the business model, I don’t consider it a danger at this point.

People want reliable income and this is where they find it. Hence, we could easily see further price appreciation in the group.

If prices on the MLPs go high enough that yields drop to the low-4% range, we’ll have to consider taking some profits, but that’s a ways off. The only other concern is if bond rates start rising rapidly. That could provide competition for these securities and bring down their prices, but so far there are only inklings of rising bond yields sometime in the future.

Move to the Suburbs
Suburban Propane Partners (SPH) is primarily a seller of propane and fuel oil used in home and commercial heating. It also does heating and air conditioning contracting, as well as supplying natural gas and electricity in places underserved by the large utilities. Its operations are concentrated mostly on the eastern and western coasts of the US, but it is expanding into other regions through small acquisitions, as opportunities present themselves. It is, in fact, a small company itself, with a market cap of just $2 billion, so has plenty of room to grow. And this is something it knows how to do very well.

We’ve owned Suburban Propane in the past but sold it because I thought the executive incentive package looked too rich. It still does, but I can’t argue with success. It apparently motivates management in a way that works out well for everyone. The stock has risen five-fold in the last two decades and still yields 6.1% after steady dividend raises in almost every year since its inception in 1996.

Another thing I like about Suburban Propane is that its revenue sources are very different from most other MLPs. The group in general is not very volatile, but all else equal, I’d rather have income that wasn’t all influenced by the exact same economic forces.

Earnings have been on the weak side the last couple of quarters as the economy continues to slowly work its way out of the doldrums, but looking back at this company’s performance  I have to believe management will find a way to keep growing shareholder value. Buy up to $60. [Shares traded below $56 Monday—Editor.]

Rock-Steady Sunoco
The reason MLPs are generally less volatile than the market as a whole is because when people see they’re getting paid on their investments every three months, they’re much less nervous, and therefore less prone to sell over some short-term blip. MLPs typically have Betas (a measure of volatility) between one-half and one-third that of the overall market. But Sunoco Logistics Partners (SXL) certainly has to be near the very top in terms of stability. The units have a Beta of 0.13, meaning they are only 13% as volatile as the market. That makes for a good night’s sleep.

As to dividends, Sunoco Logistics is a champ here too. Since its inception nine years ago, it has raised its distribution in every quarter except three. It has never lowered it. That makes for sweet dreams. On top of all that, you still get a dividend of 5.3% at the current stock price.

The company has good assets in the Northeast, the coldest part of the country, which has always been a reliable source of growth.

Insiders own about 31% of the stock, but it looks like most of it is Sunoco (SUN), from which this company was spun off.

Industry analysts expect a 7% increase in distributions from this great operator this year. One analyst thinks we may see as much as 10% boosts for several years, based on organic growth coming out of the Marcellus Shale (in New York and Pennsylvania), as well as small, accretive acquisitions. I see enough here to be firmly on board. Buy up to $91. [Shares traded slightly above $88 Monday.]

[Doug Fabian recently recommended another MLP profiting handsomely from domestic drilling, while Mark Skousen’s pick fills Suburban Propane’s niche in fast-growing Brazil—Editor.]

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