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Friday August 27, 2010
Ferrellgas LP (FGP) : Propane partnership
by Marvin Appel and Josh Mandelbaum, Systems & Strategies  Ferrellgas Partners LP (FGP) is a propane distributor whose dividend history and underlying business seem to offer the promise of a secure income stream. The partnership has a 16-year history of paying $2.00/share. This represents a yield of 8.2%. Ferrellgas is the second largest retailer of propane in the U.S. and the largest tank exchange company. The business model entails buying propane gas from third parties and moving it to Ferrellgas’s retail outlets. 
From there, either Ferrellgas fills portable propane tanks or transports gas to customers’ facilities. Propane competes with the more widely used natural gas and is popular in rural areas where natural gas pipelines may not be available. (Natural gas is generally cheaper than propane, but propane is more economical than electricity for heating, hot water or cooking.) Propane represents approximately 4% of total household energy use in the U.S., a proportion that has been stable for twenty years. About two-thirds of sales occur during the winter heating season. The financial performance of Ferrellgas and similar companies therefore depends heavily on how cold the winter is. Ferrellgas has outperformed the overall gas industry as well as the utilities sector. I do not view either Ferrellgas as having the potential for significant long-term price gains; rather, it is a potential income play. Ferrellgas is near its historical all-time high share price. Except during major bear markets, the stock has traded in the $20-$24 range most of the time, which gives you a sense of the potential price risk you are taking in holding this stock even during a normal market climate. I do expect price risk down to the $22/share level within the next year (based on the historical price behavior), but the annual dividend income of $2.00/ share should cover that risk. Ferrellgas is recommended at $24/share or lower as a long-term holding for investors seeking dependable income. Learn more about this financial newsletter at Marvin Appel's Systems & Forecasts. |
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