FYI, I have been in STON for five years. It has gone from 20 to 18...but has paid dividends and upped them a few cents at a time all along. Their industry has problem...people do continue to die but they don't have to go through an expensive burial. More people are now opting to be cremated and there is much less profit in a $500 cremation than in a funeral and burial costing thousands. There was a recent article in the WSJ trelling how the wealthy are now selling burial plots they bought a while back to raise money...and there are more plots for sale than are are buyers for them. But their distributions are in an upward trajectory, a few cents at a time so it's a good diversity play on MLP's
Hi, I thought I would pass along my views on STON. I recently sold it after holding it for a few years (including adding some shares when it sold off). The reason I bought it in the first place was that I was attracted to the yield and the idea that the cemetary/funeral business would be rolled up in the way that the big box home improvement stores rolled up the neighborhood hardware store. Also, the business of death is steady.
I knew that this stock was illiquid so I wasn't surprised to see the selloff in the bear market. They kept paying the distribution and even increased it slightly. Their GAAP earnings are difficult to understand, but the stock has always been about getting the yield.
A few things made me decide to sell. First, I believe the "death" business may actually be affected by the recession. Less and less people can afford to pre-arrange for a funeral and burial plots. Even if people have life insurance, I think their heirs are more apt to use that money on cheaper alternatives. You can even buy caskets from Costco. More people are using cremation, and although STON's margins on cremations are larger, the aggregate profit on a cremation is much less. Second, the death business and the associated accounting is difficult to understand. Proceeds received by STON from the sale of pre-need business are placed in trusts and these proceeds are invested in securities, not all of which are ultra-safe Treasuries. STON actually had unrealized losses in these trusts. Some of the debt securities that they invested in were downgraded and the equity securities also declined in value. I believe their equity portfolio still shows a loss, this despite a 50% rally in equity markets. My question is if they still are showing losses after such a large rally, what happens if the market turns south again. Another strike against STON for me was posted by someone on the STON message board. STON recently refinanced some debt that was coming due. With the recent huge rally in credit markets, you would think they would have been able to sell their debt for a great price, but instead they ended up paying double digit yields. While it is good that they were able to refinance, the fact that they had to pay a premium price is a bad omen. It's one thing to add more expensive debt if you are expanding and able to make it up with higher margins, it's quite another to use it just to repay debt previously issued. Finally, technically the stock looked like it was pinned in the $18 range. Because I am generally bearish on the economy and the market, I believe if we get a market selloff in January, illiquid, high yielding small cap stocks like STON will get whacked. To me, there was too much high risk associated with this high yield.
One lesson that I learned in investing is not to chase yield. Not all high yielding stocks are created equal. Occasionally there is a bargain, but there are more traps. To me, it's not worth the extra 2 or 3 % if the stock is illiquid and the finances less than clear. Others may disagree.
I had no idea that this kind of business could be structured as an MLP.
My understanding of MLPs is that for them to maintain divs and increase them, they require expansion for increased cash flow to throw off as divs to shareholders.
Yes, STON seeks to expand (is the second largest such company in its business in the US, I believe) by, according to its mission, by expanding the various revenue generating activities related to burial.
I view such activity (provision of burial support) in light of more of a social service, that profits should be maintained to support its operation and keep prices affordable for most folks. I am not sure if being structured as an MLP allows such a business to not be more driven by profits than service and affordability.
Then again, to have become this big makes me wonder if its size allows for more affordable costs than smaller operations.
I like its high yield, but I think its POR is very high. Low ROE. I'd rather stay with pipelines and energy for MLPs.
Thanks for introducing us to another MLP. (Sort of reminds me of the various businesses in Canada that organized themselves into trusts that throw off distributions to shareholders.)