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Can Suburban Propane Partners' Big Dividend Survive?

A chart showing Suburban Propane Partners' rebounding EBITDA.

Propane distributor Suburban Propane Partners (NYSE: SPH) has a juicy distribution yield of around 12%. That's an awfully enticing number for income-focused investors. Indeed, in the low-yield world we live in today, Suburban stands out in a big way! The problem is that weather trends haven't been good lately, a key competitor has already been forced to cut its distribution, and Suburban is burning through cash... So the big question on many investors' minds is can Suburban Propane Partners' big distribution survive?

The bad news

Let's get the bad news out of the way right up front; It's going to be tight. And there are a host of reasons for that, but one of the biggest is the vagaries of the weather. Fiscal 2015 and 2016 were historically warm years. Although propane is also used for things like drying crops and powering forklifts, its biggest use, by far, is for heating. When the winter is warm, Suburban simply doesn't deliver as much propane. To put a number on that, the company sold roughly 14% less propane last year than it did the year before.

A chart showing Suburban Propane Partners' rebounding EBITDA.

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To be honest, whether or not Suburban will cut its distribution is something of a toss up. If the rest of the winter heating season turns out to be really warm, Suburban will have trouble covering the payout. In the end, a lot depends on management's commitment to returning value to its unitholders. But on that score, there's some good news.

During its last two conference calls, Suburban has been asked about the sustainability of the distribution. During the first-quarter call, CEO Mike Stivala said "the sustainability of our distribution is what we are here for." He made a similar comment during the fourth0quarter call. And while the company didn't increase its payout in 2016, it had an over decade-long run of increases prior to that.

Moreover, the company recently replaced debt yielding 7.375% with debt yielding 5.875%. That should help free up some cash for it to use elsewhere ... like for the distribution. And in a worst-case scenario, the company could increase leverage by tapping its revolving credit facility or issuing more debt. Although that would weaken the balance sheet, it would, presumably, be a temporary move. The company has also been reducing costs, which fell 5% year over year in the first quarter. So it's working hard to put itself in a position where it can maintain its distribution.

A chart showing Suburban Propane Partners' long history of increasing distributions.

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SPH Dividend Per Share (Quarterly) YCharts

To cut or not to cut

There's no way to sugarcoat the situation at Suburban Propane: There's a real risk that the partnership's distribution could be cut. However, management has shown a commitment to returning value to unitholders, continues to make moves that should help support the current payout, and has some leeway on the balance sheet if it needs it. In the end, though, a lot will depend on the weather this winter. At this point, Suburban Propane is a high-risk income investment that you'll want to watch very closely. And another historically warm winter would be bad news. Conservative investors should probably tread cautiously or avoid it until things improve.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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