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yield hog

With barbecue season here, Canadians are filling up the propane tanks. And judging by the surging stock price of Superior Plus Corp., they’ve already been filling up their portfolios with shares of Canada’s largest propane distributor.

Toronto-based Superior, which controls an estimated 40 per cent of Canada’s propane market, has posted a sizzling total return, including dividends, of about 35 per cent in 2019 – more than double the total return of the S&P/TSX Composite Index over the same period. The gain reflects Superior’s solid first-quarter results and a recent decision to explore the sale of its specialty chemicals division to become a pure-play propane company.

Even after the recent run-up in the shares, analysts say there could be more gains ahead. Here are five reasons that Superior could continue to grill up some tasty returns. Remember to do your own due diligence before investing in any security, and always maintain a diversified portfolio to control your risk.

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An attractive yield

Superior pays a dividend of 6 cents a month or 72 cents annually, which works out to a yield of about 5.6 per cent based on Tuesday’s closing share price of $12.94 on the Toronto Stock Exchange. The company hasn’t delivered much in the way of dividend growth – the last increase was in 2014 – but the dividend is well protected thanks to Superior’s conservative payout ratio, which is estimated at less than 50 per cent of adjusted cash flow for 2019. If Superior were to sell its chemicals division, the payout ratio would rise, but company said the remaining business “would support the existing dividend policy.”

A strong propane business

Propane is Superior’s largest business, accounting for about 70 per cent of earnings before interest, taxes, depreciation and amortization. In addition to its role as a barbecue fuel, propane is used to heat homes and businesses that don’t have access to natural gas lines, power buses and forklifts, and provide an energy source for construction, mining and myriad other industries. Helped by cold weather and better-than-expected cost savings tied to the 2018 acquisition of NGL Propane LLC, a major propane distributor in the eastern United States, Superior in May posted record first-quarter results that topped expectations. The company also raised its full-year guidance, prompting several analysts to hike their price targets on the shares.

A growing U.S. footprint

The $1.17-billion acquisition of NGL Propane, which serves more than 300,000 residential, commercial and industrial customers in 22 U.S. states, provided Superior with a platform to accelerate its expansion in the U.S. market. Further beefing up its U.S. presence, Superior last year also acquired United Pacific Energy, an independent wholesale propane and butane distributor in California, the largest propane market in the United States. These deals – along with several other recent “tuck-in” acquisitions – underline the company’s ambition to become a major consolidator in the fragmented U.S. propane market.

Extra fuel for acquisitions

With valuations of chemical producers compressed by global economic uncertainty and the U.S-China trade feud, analysts were surprised by Superior’s June 10 announcement that it is considering a sale of its specialty chemicals business. However, Elias Foscolos of Industrial Alliance Securities said the announcement “strongly indicates that multiple expressions of interest have been received.” Mr. Foscolos estimates that the chemical business could fetch $1.2-billion to $1.4-billion, with other analysts speculating that the price could be as low as $920-million. Superior has said it would likely use the proceeds to invest in U.S. propane acquisitions, reduce debt and possibly buy back shares.

Even though the timing may not be ideal, a divestiture of the chemicals business makes strategic sense, analysts said. “We have been advocating the sale of [the chemicals division] for some time as it would improve the company’s balance sheet, thus providing more flexibility to deploy capital toward accretive [mergers and acquisitions], especially in the U.S. energy distribution space,” David Newman of Desjardins Securities said in a note. What’s more, selling the economically sensitive chemicals division would focus Superior on propane – a “relatively recession-resistant business which garners a higher valuation multiple vs. the chemicals business,” Mr. Newman said.

More upside for the stock?

Superior is a favourite of analysts, with 11 buy ratings and one hold, according to Refinitiv. The average 12-month price target is $14.63 – implying a price return (excluding dividends) of about 13 per cent from current levels. There are no guarantees the stock will reach that target, of course, but given Superior’s solid dividend and potential for accelerated growth in the U.S. market, the company could ultimately reward long-term investors who are willing to accept some short-term uncertainty surrounding the potential sale of the chemical assets.

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Follow John Heinzl on Twitter: @johnheinzlOpens in a new window

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