Income is a big part of investors' returns. Stocks, mutual funds and fixed income ideas in this column are featured because they are relatively solid in their ability to pay dividends or interest. We're giving income investors a resource to start their research for investments that give better yields with lower risk.

August 27, 2009 - Inergy, L.P. (NRGY-NASDAQ) together with its subsidiaries, engages primarily in the sale, distribution, storage, marketing, trade, processing, and fractionation of propane, natural gas, and other natural gas liquids (NGL) to residential, commercial, industrial, and agricultural customers in the United States and Canada. The company also operates a wholesale supply, marketing, and distribution business, providing propane procurement, transportation, and supply to its customer service centers, as well as to independent dealers, multistate marketers, petrochemical companies, refinery and gas processors, and various other NGL marketing and distribution companies in 40 states, primarily in the Midwest, Northeast, and South regions of the United States.

As of October 31, 2008, it served approximately 700,000 retail customers in 28 states from 313 customer service centers, which have an aggregate of approximately 30.7 million gallons of above-ground propane storage. Inergy Holdings, L.P. serves as general partner of the company. Inergy, L.P. was founded in 2001 and is headquartered in Kansas City, Missouri.

This is a partnership, and as such, dividends are paid from the net income. Most or all of the income is distributed to shareholders and the general partner because of the tax benefit of being a limited partnership. But it's the cash flow that makes the payments so many times in a limited partnership the dividends exceed earnings. That's because depreciation of assets is not a cash drain but will affect net income. In the case of Inergy, dividends are higher than earnings.

For the year, analysts expect earnings to reach $1.42, well above last year's 57 cents a share. For next year, the consensus is for $1.33. In 2006, earnings were negative at a minus 20 cents. So volatility of earnings is part of owning this stock.

But dividends have increased every year since the partnership went public in 2001, going from 20 cents to $1.33 in 2002. Last year, the total was $2.48. This year, payouts will be $2.66 for a yield of 9.40%.

Inergy isn't exempt from the current recession. In fact, sales this year will most likely be down to $1.65 billion, from $1.88 billion last year (a decrease of 12.3%). That's because consumers are conserving everywhere, including their heating bills. But because propane prices have decreased due to strong supply, NRGY's operating margin should increase significantly. Furthermore, NRGY started "Wheeling" with its customers. Wheeling lets the natural gas pipeline (NRGY) bill a gas company for the use of its pipeline to transport gas. This is a fee-based business, not affected by the price of gas which can be very volatile. That should help smooth out some of the volatility of NRGY's earnings going forward.

There's still plenty of growth potential in natural gas due to increase demand and supply. The company has 2 new projects scheduled to finish in early 2010 in the northeast. Analysts expect the company to continue investing in pipe and storage in this region for years. Here's the kicker with propane gas: it's being carefully studied as a possible fuel for automobiles. If it were to become the fuel of choice in the near future, all propane stocks would see strong interest.

More numbers: Market Cap is $1.55 billion. Trailing P/E is 25 while the Forward P/E is 21. Price to sales is .92. Price to Book is 2.01. Operating margin for the last 12 months was 11.11% while Profit margin was 6.02%. Return on equity was 13.5%. Total debt is $1.11 billion or 57% of capital. Current ratio is .94. Book Value per share is $13.76.

One word of caution: this is a limited partnership which means the dividend is unrelated business income which can be a concern if these shares are held in a tax-exempt account. Be sure to consult your tax professional if you plan on using these shares in a tax-exempt account.

- Company Web site: www.inergypropane.com

Ted Allrich