StoneMor Partners (STON) is a master limited partnership funeral services provider that manages over 275 cemeteries and more than 90 funeral homes in the United States and Puerto Rico. It participates in the sales of burial plots, lawn and mausoleum crypts, cremation services, caskets, and funeral services, on a pre-need and at-need basis.
In recent months, however, the company has struggled to generate positive results at the bottom line. Its normally prosperous strategy of acquiring small, privately-owned cemetery operators for increased geographic coverage has yielded disappointing results. Although, in its most recent earnings period management was able to ink a deal with the Archdiocese of Philadelphia that offers it the opportunity to manage 13 Roman Catholic cemeteries in the Philadelphia area for a period of 60 years. On the whole, these locations perform an average of 7,000 burials per year.
Its competitors have continued to expand, however. Industry constituents have diversified product offerings and have even branched out into new industries. Hillenbrand Inc. (HI) is a perfect example. Its process equipment group, which offers size reduction and plastic compounding products, has expanded greatly, likely supplying the company with the wherewithal to further grow its casket business. Meanwhile, a merger recently took place between two of the industry’s largest death care providers. Service Corp. International (SCI) purchased Stewart Enterprises (STEI), creating what is now the largest company in the industry. If StoneMor wants to continue competing, it will need to further advance operational performance, and continue to gain the attention of potential clientele.
However, we note that the stock does possess a particular trait that some investors may find appealing. It currently pays a quarterly distribution of $0.60 per share, generating a yield of 10.0% at the recent quotation. This distribution has increased consistently over the past few years, despite the company’s operational struggles. StoneMor’s status as a master limited partnership, and the sale of plots and mausoleums as a form of real estate, have helped the company avoid major corporate taxes and helped shareholders evade a variety of other dividend-based income taxes.
At this juncture, given StoneMor’s profitability issues, the biggest question surrounding this issue is the sustainability of this distribution. Poor profit margins and cash flow concerns can easily generate skepticism among potential investors. And based on recent conference calls, it seems likely that margin contraction will continue through 2013. The reason for this contraction, however, is the company’s intent to further pursue geographic expansion. The once successful business model, which suffered during the country’s most recent recession, is set for a reboot in the second half of the calendar year, and further into 2014.
Meanwhile, consumer spending trends on the whole, have hurt growth potential. Industry trends, such as rising demand for cremation services for at-need burials, which obviously do not require the services of a cemetery operator, leave the company in an unfavorable position. Still, an abnormally strong flu season, the anticipation of an improved pricing environment that would lead to higher-margin product sales, and the opportunity to develop relationships with customers in new geographic locations should help aid expansion. Even should burial trends regarding cremation not normalize, we tend to believe the cash flows generated by new properties in the near term will help the company maintain its payouts until new operations are fully ramped up. In the interim, StoneMor has endured an IRS audit, and once again avoided the possibility of double taxation, maintained its eligibility as a publicly traded partnership, and dodged other operating costs that could have set it back greatly.
All told, this company is growing, albeit slowly. And though recent struggles would lead one to believe the dividend distribution is not sustainable, we note the company’s ability to continue raising the payout during the most recent recession. It is the second largest cemetery operator in the United States, and though its debt totals have expanded over the last few years, it does not seem that the company has overextended itself yet. With that said, concern is understandable, and we do believe the rate at which StoneMor has increased this distribution will slow immensely over the next few years. But the company’s long-term growth strategy in this defensive industry should allow it to continue offering this perk to its shareholders.
At the time of this article’s writing the author did not have any positions in any of the companies mentioned.