StoneMor: RIP REIT

08/20/2014 8:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Each month, Ian Wyatt, editor of High Yield Wealth, highlights the top income stocks for current purchase; one of his latest favorites is an under-followed REIT focused on cemeteries.

StoneMor Partners, LP (STON), the largest operator of cemeteries in the United States, is the Rodney Dangerfield of investments: It can't get any respect, though it deserves it.

Most investors simply don't understand the business and value StoneMor incorrectly.

For one, investors continually focus on earnings and that should not be the focus because StoneMor is a quasi-REIT and has high non-cash expenses and deferred-revenue recognition, which depress earnings.

Investors should focus on distributable cash flow, which is used to fund the distribution. In the latest reported quarter, distributable cash flow increased to $22.1 million from $17.6 million in the same year-earlier period, a 25.6% increase.

Investors also tend to focus on StoneMor's equity dilution. This isn't an issue because this is exactly how all master limited partnerships (MLPs) expand. By design, they pay out nearly all distributable cash flow and issue more units to fund growth.

For years, we've been reading comments on the popular investing Web sites on StoneMor's inability to sustain its distribution, and yet each year the distribution is raised. The latest increase occurred just two weeks ago, and lifts the annual distribution to $2.44 a unit.

Investor misconceptions make StoneMor a value buy and one of the highest-yielding MLPs on the market.

The partnership recently reaffirmed its intent to increase quarterly distributions at least one cent a unit each quarter through 2015. By the end of next year, investors will receive $2.64 in annual distributions.

The misconception may one day dissipate, but even if it doesn't, a 10.3% yield and a long history of annual distribution increases are worthwhile consolations.

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