A Huge Special Dividend Opportunity


I love to find catalysts that will drive my stocks higher and produce accelerated gains. One of the best catalysts is a dividend, especially one that's stable and rising. And more so a huge dividend. That's the path I used back in April, when I looked at CVR Energy Partners (NYS: UAN) . Since then, the stock has climbed 30%, versus the S&P's decline of 7%. That's some solid outperformance, and I think the stock still has room to run, but I'm back today to highlight another stock that may be able to do the same.

Take a ride on this dividend train
Dividends can unlock value in a stock, and it's a method that I use in my Special Situations portfolio. I'm always on the lookout for such special situations, and I'm now looking at Cedar Fair (NYS: FUN) , a master limited partnership that runs amusement parks and water parks across the U.S. and attracted 22 million visitors last year. At around $19, its units (partnership lingo for shares) look attractively priced.

You might be familiar with some of its bigger locations, such as Kings Dominion, Knott's Berry Farm, and Dorney Park. Its assets also include Cedar Point, the largest seasonal amusement park in the U.S. and one that has been named the Best Amusement Park in the World by an international survey of Amusement Today, a monthly trade magazine. Cedar Fair's properties appeal most strongly to 12- to 24-year-olds and families. While families are attracted by the wholesome atmosphere, the younger set comes for the thrill rides.

The economics of amusement parks can be very attractive, especially in good times. Operators such as Cedar Fair, Six Flags (NYS: SIX) , and Disney (NYS: DIS) can leverage the high fixed costs of the business to drive very high profitability, since it doesn't cost much more to operate a park for 10,000 guests or 20,000. So that incremental revenue falls quickly to the bottom line. But it can cut both ways, with park operators forced to stay open during bad times. So a move into more flush financial times could be great for the company.

Cedar Fair mitigates this difficulty somewhat by operating mainly seasonal parks. Its seasonal parks are open only weekends in April and May, but then throw their doors wide open from Memorial Day until Labor Day. As the days get cooler, they then scale back to weekends again in September and October. Consequently, revenues at these parks are generated in only about 130 to 140 days of the year, when the weather is mildest.

For its latest quarter, the company reported an increase in revenue of 3%, which was a result of increased attendance and greater spending inside its parks. The increased attendance, even minor, in such a dour economic climate is encouraging. And in a high-fixed-cost operation, the business can grow revenue slowly and still generate sizable cash flow. Given the company's strong performance in July, management is sticking by its revenue and cash flow targets for the year. And that should lead to a strong payout.

A dividend to drive returns
I was attracted by the company's increasing distribution in the next couple years. For 2011, Cedar Fair expects to pay $1 per unit, a number that won't be reflected in most publicly available financial sites. But more importantly the company expects the yield to grow to $1.35 to $1.65 next year and to $2 per unit in 2013. The company revealed these figures on its conference call, so you won't find them many other places.

Based on other publicly traded partnerships (albeit in a different industry), a typical yield looks to be around the mid-sixes, as you can see below:



Linn Energy LP (NAS: LINE)


Energy Transfer Partners LP (NYS: ETP)


Atlas Pipeline Partners LP (NYS: APL)


El Paso Pipeline Partners LP


Boardwalk Pipeline Partners LP




Source: Capital IQ, a division of Standard & Poor's.

Giving a comparable payout to Cedar Fair would put the units at $23 next year (at the midpoint of payout guidance) and nearly $31 based on 2013's expected payout. That translates into gains of 20% for next year and 60% by 2013, assuming the units end up yielding about the market average. Even if the units trade above the market average yield, they still look to have substantial upside.

No stock is without risks and Cedar Fair is no different. Because of its seasonal business, the company pays a lumpy dividend, a fact that deters many investors. For example, following its Sept. 15 distribution of $0.12, the company will have paid just 30% of its expected $1 payout for this year. The remainder will be paid in the fourth quarter. Lumps payouts lead to lumpy stock prices.

And because weather is important to this seasonal business, the company needs to have not-too-hot summers that encourage attendance at its parks and attractions. Also important are the shoulder months, like October, that could drive incremental revenue.

The company has a significant amount of debt -- $1.75 billion against a market cap of $1.1 billion. But the company is working to get its debt situation under control, as cash flows improve.

Foolish bottom line
With a yield that's about 5.2% at current prices, Cedar Fair seems to have room to run as the dividend ratchets up. But given the nature of its uneven payouts, this stock may not be for all investors, especially those looking for stable quarterly income. For those who demand such stable payouts, I invite you to take a look at the dividend stocks in a free report from The Motley Fool called "13 High-Yielding Stocks to Buy Today." Hundreds of thousands have requested access to this special free report, and now you can access it today at no cost. To get instant access to the names of these 13 high yielders, simply click here -- it's free.

At the time thisarticle was published Jim Royal, Ph.D., does not own shares in any company mentioned here. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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