Cedar Fair (NYSE:FUN) operates amusement parks across the United States and Canada. The company's parks are popular, attracting 26 million visitors in 2018. But investors are likely more amused by the company's dividend yield, which exceeds 7.3%. It's high by anyone's standards, but is it dependable?
Cedar Fair's dividend yield
It makes sense for Cedar Fair to have a healthy dividend yield. The company is structured as a master limited partnership (MLP), which enables it to avoid paying federal and state taxes at the corporate level. This leaves more money for distribution to unitholders and creates a tax benefit for dividends because they are only taxed at the individual unitholder level. Most corporations suffer from "double taxation," where earnings are taxed at the corporate level and dividends paid from those earnings are taxed again at the individual level.
To maintain MLP status, a company must generate at least 90% of its income from qualifying activities, including those related to natural resources, commodities, or real estate. Cedar Fair meets this requirement through its ownership of almost all the real estate associated with its parks.
That being said, at over 7.3%, Cedar Fair's dividend yield is much higher than where it has historically floated. It is also higher than the dividend yield of its closest peer, Six Flags. Many investors may see this as an attractive buying opportunity, but it could also be a red flag that Cedar Fair's dividend is unsustainable.
What's driving the yield higher?
Cedar Fair's stock price has dropped roughly 27% over the past year, and a dropping price means a higher yield. There are a few factors that may have exerted downward pressure on Cedar Fair's stock price.
For one thing, interest rates have been rising and this could be affecting investors' opinion of the stock in two ways.
First, with $1.8 billion in total debt, the company has seen its borrowing costs increase as it has taken on more debt. Rising borrowing costs put downward pressure on net income, which affects a company's ability to pay dividends, and this could be causing investors to perceive the dividend to be at greater risk of a cut and thus more may be selling.
Second, high-yielding stocks are often viewed as an alternative to investing in bonds. When interest rates rise, bonds become relatively more attractive as investments, and many investors reallocate their money in favor of bonds.
Another possible explanation for the rise in Cedar Fair's dividend yield -- especially over the past six months -- is that it reflects investors' selling shares based on increased fear of a recession. As an amusement park operator, Cedar Fair is economically sensitive because it depends on consumer discretionary spending. Fewer people can afford to visit an amusement park during an economic downturn.
Cedar Fair's elevated dividend yield can most likely be attributed to a mix of these reasons. Investors are likely concerned that the company's dividend is at risk and that has pushed the share price down.
Cedar Fair's balance sheet
When judging a dividend, it's important to look at debt and income. As the table below shows, Cedar Fair has a significant amount of debt and an elevated leverage ratio. When debt is several times greater than earnings available to service debt -- as it is for Cedar Fair with a leverage ratio of 3.7 -- a company has a reduced ability to repay debt.
|Metric||As of March 31, 2019|
|Net debt (total debt less cash)||$1.72 billion|
|Last 12 months adjusted EBITDA||$465 million|
|Net leverage (net debt divided by EBITDA)||3.7|
For a cyclical company operating at what looks to be near the end of a great run for the economy, Cedar Fair's balance sheet could be considered somewhat risky. If the economy slows and fewer people go to its amusement parks, earnings will decline and its leverage ratio will rise. Then it might need to cut its dividend or raise capital to shore up its balance sheet.
In 2009 -- the most recent recession -- Cedar Fair's adjusted EBITDA fell 16%. In response, the company cut its quarterly dividend by 48%. Although 2009 is an extreme example, it shows that the company's balance sheet could become stretched during the next downturn.
Cash flow vs. dividend payments
Another good indicator of a company's dividend sustainability is its ability to meet dividend payments with business cash flows. Cedar Fair fails this test. As the table below shows, for the past two years, the company has not generated sufficient free cash flow to cover its dividend payments. In fact, over the past three years, Cedar Fair's total dividend payments have risen while free cash flow has declined.
|Free cash flow||$197.6 million||$143.1 million||$160.9 million|
|Total dividends paid||$187.2 million||$194.8 million||$203.2 million|
The data suggests that the company has financed dividend payments through increased financial leverage. This is corroborated by the balance sheet, which has shown a steady rise in total and net borrowings over the past few years.
The bottom line is that Cedar Fair's current dividend doesn't appear to be sustainable based on an analysis of its cash flows.
Don't count on Cedar Fair's dividend
Cedar Fair has a moderately leveraged balance sheet that would most likely require a dividend cut during an economic downturn that decreased the number of visitors to its parks. Furthermore, the company doesn't generate enough free cash flow to cover its current dividend payments.
There are times when a high dividend yield represents a buying opportunity, but this is not one of those cases.