AmeriGas Partners (APU) is a master limited partnership that offers a big, safe, 8.2% yield. It has a low beta, low volatility, and exceptionally high returns on its invested capital. It is currently trading an attractive price. And even though AmeriGas operates in an industry (propane sales) with downward long-term price pressure, its big distribution payments are still very safe for many years to come, especially relative to other big yield opportunities. AmeriGas is a standout “widows and orphans” investment.

About AmeriGas
AmeriGas sells propane to over 2 million customers across all 50 states through its approximately 2,000 distribution locations. If you don’t know, propane is a by-product of natural gas processing and petroleum refining. It is used for home heating, space heating, water heating, cooking, grilling, and motor fuel, to name a few. The company has been around since the 1950’s, and it is currently the largest marketer of propane in the United States.

AmeriGas by the Numbers
AmeriGas currently pays its unitholders $0.94 per quarter which amounts to an 8.2% yield. And as the following chart shows, it has a long history of increasing its distribution payments.

AmeriGas also offer attractive diversification benefits and lower volatility. For example, its beta is only around 0.2 which means it is less sensitive to systemic market-wide risks than other typical investments. It also means AmeriGas can offer very important diversification benefits to risk averse investment portfolios. Additionally, AmeriGas is less volatile than other big yield investments. For example, we compared the daily and monthly volatility of AmeriGas to other big yield investments over the last year-to-date, 1-year, 3-year and 5-year periods, and found AmeriGas to exhibit significantly less absolute volatility (this is different from “beta” because it’s absolute volatility instead of volatility relative to the overall market as measured by beta).  Our analysis included over 200 securities with dividends greater than 5%, market caps greater than $500 million, and revenues greater than $100 million. For your reference, here is an abridged view of some of the most and least volatile big yield securities.

AmeriGas also offers a very attractive return on capital versus its cost of capital. According to the reasonable assumptions at GuruFocus, AmeriGas’ weighted average cost of capital (WACC) is only 4.14%, and its return on invested capital is 11.58%. This is an exceptionally wide margin, and it means it only costs AmeriGas 4.14% to raise capital, and they can turn around and earn a return of 11.58% on that capital. This is a great margin.

Additionally, AmeriGas is trading at an attractive price. For example, a basic discounted cash flow model suggests the company is worth roughly twice its current market price. Specifically, if we discount 2015 free cash flow of $421.85 million (cash from ops of $523.86 million minus capex of $102.01 million) by the 4.14% WACC and assume a zero percent growth rate then AmeriGas is worth $10.2 billion or almost $110 per share. Similarly, a dividend discount model suggest the company is worth even more. Specifically, if we discount the expected 2016 dividend payments of $349 million ($0.94 per share times 92.92 million shares) by the 3.16% cost of equity and assume a conservative zero percent growth rate (management’s actual goal is to grow the dividend by 5% annually) then AmeriGas is worth over $11 billion. These valuations use a variety of assumptions that are subject to discretion (for example the cost of equity capital is very low because the beta used in the CAPM equation is very low), but the point is that both valuation metrics suggest AmeriGas is not overvalued.

Risks
It is worth considering some of the risk factors that AmeriGas faces. For example, the propane industry is not expected to grow rapidly. Management describes the way this risk could impact revenue growth by saying “the retail propane industry has been declining over the past several years, with no or modest growth in total demand foreseen in the next several years.” (Annual Report, p.10). However, the Propane Education & Research Council provides a more optimistic view of the industry explaining “the decline in oil prices and the corresponding decline in propane prices in 2014 and 2015 provides a window of opportunity for propane to increase market share in traditional markets that have been hurt by higher propane prices in the last five years.”

Additional risks include warmer weather (demand decreases when the weather is warmer), the availability of new acquisitions (AmeriGas has historically fueled growth, in part, with acquisitions), competition (AmeriGas is the biggest marketer of propane in the US but they are still far from marketing the majority of propane in the US), the MLP structure (AmeriGas faces limitations on how it can operate its business and still qualify as an MLP, plus each unitholder receives a K1 tax form at the end of the year), and the management structure (AmeriGas has an agreement with Energy Transfer Partners that could delay or prevent a change in control, which could adversely affect the price of AmeriGas common units).

Conclusion
We believe AmeriGas’ big 8.2% yield is safe and attractive. Specifically, we like AmeriGas so much that we’ve ranked it #20 on our list of 20 Big Yield Investment Worth Considering because of its low beta (it’s a great diversifier), low volatility (low risk), and exceptionally high returns on capital. If you are a long-term income-focused investor, we believe AmeriGas is worth considering