Dear Mr. Berko: My spouse and I are both in our early 60s, and we have $10,000, with the hope of being able to get an 8 to 9 percent return. I know this may be a high reach because we don’t want to own any volatile issues. If there is such an animal that could give us this return, with moderate risks, we’d be very appreciative. — PC, Akron, Ohio
Dear PC: My friend Velveeta Jackson has accused me of eating too many Twinkies under the power lines, because the issues I recommend tend to be income stocks. But Velveeta is only partially right. I love the taste and texture of Twinkies and probably eat too many, but I always stay far from all those power lines because they give most people (including me) the hiccups. Sometimes they may cure hiccups, too.
Velveeta is right as rain when it comes to her observation about most of this column’s recommendations. I tend to suggest investing in stocks that pay fair to handsome dividends, and dividend stocks don’t fall as much as the stock market when the market falls. So the stock I’ll recommend here is called AmeriGas Partners (APU-$41.97), which is one of the nation’s largest propane distributors, with over 2 million customers (residential, commercial, industrial and agricultural) in all 50 states via nearly 2,000 distribution centers. A couple hundred shares should give you a comfortable 9.1 percent return.
For grins and giggles, let’s assume today is March 14, 2008, and you bought 300 shares of APU at $33 a share and instructed your stockbroker to reinvest all the distributions. Now it’s exactly 10 years later, and your $10,000 APU investment has grown to 685 shares worth $28,750. That’s an 11.2 percent average annual return in those 10 years. Now let’s assume that you bought 300 shares of APU and didn’t reinvest the distributions; rather, you spent those dividends on baubles, bangles and beads. Your shares of APU would be worth $23,200, and that’s an 8.78 percent average annual return.
I’ve liked APU since 2004, when it was trading in the $30 range, and since then, the board of directors has raised its distribution 13 times, from $2.20 a share in 2004 to $3.80 this year. And Wall Street believes that in the coming four years, APU’s distributions could reach $4.25 a share. That would be a 10.25 percent return on today’s $41.97 price. Since 2004, revenues have grown from $1.8 billion to an expected $2.55 billion this year. And a significant portion of the distributions is not taxable.
During the past 14 years, APU has grown by acquiring 91 smaller companies, fitting them nicely and comfortably into the AmeriGas business model. Last year, APU acquired five small-scale operations, and in the coming four years, management expects to bring 20 to 25 small propane suppliers into the AmeriGas fold. Meanwhile, the company is getting its financial house in order — extending some of its bond maturities while lowering its average annual interest costs and consolidating some of its debt to lower payments. This has also increased APU’s net profit margins very nicely. Management recently entered into a $225 million equity commitment pact with UGI to finance further acquisitions. And there’s another $380 million available under a revolving credit agreement.
APU’s focus is not short-term investment but a fine total return investment for those with three to five years’ worth of patience. Value Line suggests that in the next four years, APU could trade in a range between $50 and $70. The 9.1 percent dividend, which is considered return of capital and therefore minimally taxable, is quite attractive, and steady increases in the payout appear more certain. This makes APU much friendlier to hold as it works to meet its attractive four-year price objective. That’s why OppenheimerFunds, Allianz Global Investors, Goldman Sachs, First Trust and Fidelity, plus 250 other institutions, own nearly 70 percent of APU’s 93 million units. And I think you ought to add your name to this list.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.