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Berko: AmeriGas provides a solid investment

By Malcolm Berko
Published: May 28, 2016, 6:00am

Dear Mr. Berko: My wife and I are 87 and both in fair health. We just liquidated 1,000 shares of Cognex at $28 and 1,000 shares of United Continental Holdings at $43 and took sizable losses. Our new broker recommended that we buy 1,000 shares of AmeriGas for rising income and very modest growth. We have a fair amount of income from other sources, but we are trying to arrange this large portfolio of ours for income and growth for our six grandkids. What is your opinion of AmeriGas?

— G.R., Vancouver

Dear G.R.: AmeriGas (APU-$43.50) is the largest retail propane distributer in the country and owns 15 percent of a very fragmented market. Last year, APU sold propane to 2.1 million residential, commercial, industrial, motor fuel and agricultural customers through 2,000 distributors located in every state. That includes the last two, which joined the union in 1959 and screwed up the contiguous U.S. coastline. APU markets propane under various trade names, such as Heritage Propane. APU also sells, installs and services propane appliances, including commercial and residential heating and air conditioning systems. And the current 94-cent quarterly dividend, which has been raised for the 12th consecutive year, yields a sweet 8.5 percent.

Revenues fell 22 percent last year and will fall about 19 percent this year because of unseasonably mild weather. However, revenues for 2017 are expected to pick up nicely, this time enhanced by lower prices and a string of small but complementary acquisitions in a fragmented propane market. Management has an aggressive acquisition program that’s attractive to smaller vendors and has proven success with over 100 sellers in the past dozen years. APU’s acquisition management team has an exceptional reputation that has earned the trust and respect of many hundreds of smaller, independent propane distributors. In fact, APU’s acquisition pipeline is in daily communication with potential sellers and actively searches the country for independents that could benefit from APU’s lower costs, greater flexibility, expert marketing skills, attractive cash flow, excellent industry reputation and strong banking connections. Acquisitions are an important component to APU’s growth strategy.

APU also has bragging rights to some excellent numbers. Its 9.1 percent net profit margins are the best in the industry; its 6.2 percent return on assets and its 18.1 percent return on equity are equally impressive, as is its $508 million cash flow.

This year, even on lower revenues, APU expects to earn $2.29 a share, which would be up from 2015’s $1.91. And in 2017, management believes that it will earn $2.71 (some suggest closer to $2.90) on slightly higher revenues. A forward price-earnings ratio of 16-to-1 suggests that APU’s value could easily move higher. Star Gas Partners (SGU-$9) trades at 34 times earnings. Suburban Propane Partners (SPH-$32) trades at 28 times projected 2017 earnings. And Ferrellgas Partners (FGP-$29) trades at 25 times 2017 earnings.

Because enthusiasts think APU could trade in the low $50s and because the dividend is secure, Oppenheimer, Royal Bank of Canada, Goldman Sachs, J.P. Morgan and Morgan Stanley collectively own millions of shares. I’m comfortable with your broker’s recommendation for these reasons: 1) APU observers believe the dividend will be raised an average of 6 to 7 percent annually over the coming years. 2) APU has a proven growth strategy. 3) The dividend is reliable. 4) The shares have a low beta. And 5) the dividend isn’t subject to federal tax, so you can spend every dollar it pays you. However, the dividend is considered a return of capital, which reduces your basis each quarter.


Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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