Cedar Fair operates as a master limited partnership. This means, similar to a real estate investment trust (REIT) they can pass along more of their profits shareholders with a healthy dividend. In 2018, the partnership paid out just over $200 million in cash distributions which have a current yield of 7.4%. Like a lot of dividend-paying stocks, Cedar Fair is not a growth stock. But with a dividend yield that is currently over 7 percent, it doesn’t have to be. Investors can sit back and collect over $700 annually on a $10,000 investment. That’s some nice income for a stock that has been flat for most of 2019 and down 25% over the past 12 months. There are arguments for and against Cedar Fair (NYSE: FUN), but it is a solid dividend play for the rest of 2019 and going forward.
Why investors should ignore slowing growth
Cedar Fair is a cyclical stock. This is because during a good part of the year, many of their properties are closed which suppresses revenue. This became more of an acute problem in 2017 and 2018 as the company saw slower growth due to lower attendance at some of their amusement park properties. However, growth is growth and if management is to be believed, the company will achieve its tenth consecutive year of revenue growth in 2019. Of course, answering the question of why is more important than knowing the what. In the case of Cedar Fair, in an economy that has been healthy for the last two years, consumers didn’t just decide not to visit amusement parks. The company cites untimely weather as a reason for the decline. In any event, the company is not simply relying on better weather to drive attendance and have continued to invest in new rides and attractions. But new rides alone are not the only factor that is driving investor attention. The company works hard to create a Disney-esque experience that keeps guest on the surrounding properties, helping them generate out-of-park revenue. With all that said, the company is expecting revenue to be up 4% which should be more than enough to ensure that the current dividend is safe for now.
The company is counting on growth through acquisition
The company recently acquired two award-winning “iconic” Schlitterbahn brand water parks that give the company access to the Texas market. By themselves, the two Schlitterbahn parks generated just under $70 million of revenue in 2018. The other 12 properties that comprise the Cedar Fair brand generated $1.35 billion. When commenting on the acquisition, management said: “Cedar Fair expects the two Texas locations to achieve an adjusted EBITDA margin in line with Cedar Fair’s standalone results as management implements a number of growth and operational initiatives at the parks over the next two years, reflecting an accretive EBITDA multiple post-synergies”. Translation, the company does not necessarily expect the new acquisitions to be as profitable as the rest of the portfolio in the short term, but when brought into the operational expertise of the Cedar Fair brand they should be able to improve the margin.
Of course, the flip side to these acquisitions is the price tag. In the case of the Schlitterbahn properties, the company issued $500 million of 10-year senior unsecured notes with a rate of 5.25 percent. However, not all of that money is required to complete the purchase. The company is planning to use an additional $150 million to buy the land underneath their California Great America Park, which will erase their lease costs and give them more control of the property.
Critics wonder if the dividend is sustainable
Of course, the flip side of high dividend yield is that it could be a sign that the company has underlying trouble and some analysts are concerned that over the last two years their current dividend payments have exceeded the company’s free cash flow. But as we pointed out above, the slower growth over the last two years seems to be more related to external factors (i.e. weather) as opposed to a fundamental problem with their model, which gives them a fairly significant economic moat.
The other question related to the sustainability of their dividend is the debt that they have taken on through acquisition. However, the debt that the company has assumed is expected to pay off with a projected EBITDA that is expected to rise to over 20% from 2018 levels by 2023 ($575 million versus $468 million). If free cash flow growth mirrors its EBITDA growth, the company should have approximately $260 million in free cash flow by 2023 which would allow the company to cover its current dividend yield.
The fundamentals for Cedar Fair are too strong to overlook
In the short term, FUN’s stock has a dividend yield of over 7% and the stock currently trades for less than 15 times forward earnings. However, with anticipated revenue from their recent acquisitions and organic growth at their existing properties, this is a great time to buy Cedar Fair stock.