Suburban Propane Partners (SPH) is a New Jersey-based distributor of propane, fuel oil, diesel, kerosene, and gasoline to heat homes and buildings. It pays out an annual $1.30 dividend which at today's price of $15.76 gives the stock an 8.2% yield. Along with its low price-to-earnings multiple, value buyers are looking at SPH stock and related covered call plays.

Analysts project earnings per share (EPS) will reach $2.60 this fiscal year ending Sept. 30 and $2.44 next year. That puts SPH stock on a forward multiple of just 6.4x this year's earnings and 6.8x next year.

Earnings Cover the Dividend Payment

More importantly, the company recently said its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for the third quarter was $29.2 million. This was an improvement of nearly $6 million compared to the prior year, or 25.9% higher.

In addition, the CEO, Mike Stivala, told investors on the latest conference call that its dividend distribution coverage was strong. Over the last 12 months, its cash flow has exceeded the distribution by 2.6x, after including the company's essential capex spending for maintenance purposes. 

This means that the dividend is not likely to be cut anytime soon. Since cash flow could be hit by 50% and it would still be able to finance the dividend.

Where This Leaves Investors in SPH Stock

This past summer was hotter than usual but most of its earnings come from the winter months. This makes the projection for this winter difficult. But if the price of oil stays high and if past harsh winter temperatures play out, the company's earnings could skyrocket.

But, of course, there is no guarantee and the stock could falter. In fact, in the past four years, the stock has had an average dividend yield of over 10%. Nevertheless, year-to-date SPH stock is up over 4.0%.

Given this soft performance, it might make sense to sell covered calls on an in-the-money basis. Usually, covered calls are sold out-of-the-money. For example, the $15.00 strike price now offers a premium of $1.05.

This is the same as buying the stock at $15.76 today and immediately selling it at $16.05. That produces a monthly gain of 29 cents, or 1.84% (i.e., $0.29/$15.76). On an annualized basis that is a return of over 22%.

This also has the added advantage of providing protection if the stock falls below $15.00 by Oct. 21. For example, the breakeven here on the downside is if SPH falls below $14.71 by Oct. 21 (i.e., $15.76-$1.05).

Either way, value investors are looking very carefully at SPH stock, given its high yield and covered call play opportunities.

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