When a Wealthy Retirement reader suggested I look at Suburban Propane Partners (NYSE: SPH) for this week’s Safety Net column, I was excited to make a King of the Hill joke.

If you never watched the show, which ran from 1997 to 2010, the lead character, Hank Hill, was very proud of his job selling “propane and propane accessories.”

But lo and behold, Suburban Propane Partners sells only propane – no accessories.

And while Hank Hill works for the fictional Strickland Propane, let’s see whether he’d be equally as proud of the real-life Suburban Propane Partners’ distribution (because the company is a partnership, its dividend is called a distribution).

Suburban Propane Partners is a small cap company that offers propane and heating oil in 41 states to 1 million customers. The Whippany, New Jersey-based company has been around since 1928.

It pays a generous $0.30 per share quarterly distribution, which equals an 8% annual yield. But can Suburban Propane maintain that yield?

The company’s free cash flow slipped last year to $177 million from $192 million. This year, it is forecast to decline another 7% to $164 million.

Last year, the company paid investors $130.2 million in distributions for a payout ratio of 73% – which is near the top of my comfort zone but still fine.

Due to a distribution cut in late 2020, the company is projected to pay only $75 million in distributions for a very affordable 46% payout ratio.

Suburban Propane has paid a distribution since 1997. In 2017, it slashed the distribution to $0.60 per unit from $0.887. It cut the distribution in half to $0.30 in November of last year.

So we have an interesting situation…

Suburban Propane Partners should be able to easily cover its distribution this year. However, free cash flow is falling, which gets negative marks from SafetyNet Pro.

And the company’s recent history of cutting the distribution is also a big warning sign.

If free cash flow can stabilize, the distribution should as well.

But if free cash flow continues to decline, it is very likely the company will once again lower its distribution.

Maybe it needs to start selling high-margin accessories to increase cash flow…

Until Suburban Propane Partners reverses its falling free cash flow, the distribution cannot be considered safe.

Dividend Safety Rating: F