StoneMor (STON) is one of the few publicly-traded companies in the “deathcare” market, with 316 cemeteries and 94 funeral homes in 27 states and Puerto Rico, explains Jimmy Mengel, editor of The Crow’s Nest.
With its size, it is also able to act as a full-service provider. Its website helps people research burial options, find cemeteries, and even obtain “final expense” insurance plans.
The company has been publicly-traded and operating as a master limited partnership for about a dozen years, returning 90% of income to shareholders along the way.
Keep in mind that MLPs do not pay taxes at the corporate level but at the limited partner level. This results in higher yields to investors since it avoids the double-taxation of dividends. That’s part of why StoneMor currently yields an insane 19% dividend.
There are very few scale players that can act as industry consolidators like StoneMor, there is virtually no growth in cemetery supply, and there are high barriers to entry regarding capital and regulatory requirements.
In other words, it is a good market for some expansion by a company with a low tax burden and a history of returning dividends to shareholders.
Over the years, this was a steady and profitable business. StoneMor slowly acquired new properties in the largely fragmented market.
This is a $20 billion industry dominated by concentrated independents and non-economic owners. Think of mom-and-pop funeral homes and church-owned cemeteries. Only 14% of funeral homes and cemeteries are owned by large corporations.
That isn’t to say the business hasn’t had its problems. In October 2016, the company had to cut its dividend payments in half. Share prices, which had been largely range-bound for five years, shed 45% in one day.
Even worse, the company’s net loss jumped from $3.26 million to $11.6 million. A new sales force initiative had backfired as the backlog of vaults and markers ballooned.
Management is now focused on reducing debt payment and returning to the best practices that have served the company well for over a decade. On the sales side of the equation, the company has hired an experienced national sales manager and hired a national sales force recruiting firm.
If management can deliver positive results, we’re going to see distributions increase over the next couple years, and can expect share prices to recover. We have the stock in our portfolio at $7.67 and are comfortable buying for the meaty dividend under $8.50.
Jimmy Mengel is editor of The Crow’s Nest.
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