Should You Buy This TSX Stock for its 7.3% Dividend Yield?

Here’s why you need to avoid Superior Plus stock right now.

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Sometimes, nothing goes right for a company. It posts a loss in the previous year and just as it eyes a comeback, a pandemic strikes. But, hey, this company operates in the energy and specialty chemicals space, and the whole world is more or less sitting at home. So there should be an increase in the amount of heat consumed.

However, Canada decides to have a warm winter. So, even though the company runs an essential service, it posts poor results in the first quarter of the year. And the outlook for the rest of the year doesn’t look too great either.

I had written about Superior Plus (TSX:SPB) in March when I had asked people to buy the stock. SPB shares were then trading at $7.25, which was 47% below its 52-week high. Today the stock trades at $9.9 at writing, which would have given an investor a 36% return on their investment. The company’s forward dividend yield stands at an attractive 7.3%.

Normally, this would be a vindication of my hypothesis and I would have asked you double down on your bet. However, investors who have bought Superior should not add more shares to their portfolio.

The company announced its first-quarter results and as stated above, the numbers were less than impressive. Superior’s adjusted EBITDA decreased by 9% or $20.6 million to $219.3 million compared to the same period in 2019. This was due to lower returns from its U.S. propane distribution and lower EBITDA from its specialty chemicals segment.

Net cash flows from operating activities were $84.8 million, down $27.4 million from 2019. Specialty Chemicals recorded lower numbers because of lower Chlor-alkali sales prices and volumes.

What’s in store for this TSX stock?

The weather didn’t help Superior either, as the Eastern U.S. recorded 17% warmer weather than the previous year and Canada recorded 10% warmer weather than 2019, leading to lower sales volumes.

While Superior hasn’t experienced any disruptions in its operational activities because of COVID-19, it expects 2020 adjusted EBITDA to be at closer to $475 million instead of its previous guidance range of between $475 million to $515 million. The company has reduced its capex by approximately $30 million for 2020.

Granted, most of these problems aren’t unique to Superior. Indeed, companies across the board are grappling with similar challenges. However, Superior’s debt has been rising and the business environment in April and May has been worse than Q1.

Superior’s total debt as on March 31, 2020, was $2.04 billion, an increase of $89 million from December 31, 2019. The company’s total debt to adjusted EBITDA leverage ratio for the trailing 12 months was 4.0 as of March 31, 2020, compared to 3.7 on December 31, 2019. It had available liquidity of $232.1 million that it could access under credit facilities on March 31, 2020.

The investors who already own Superior stock can hold on to it until there is more clarity on how the second quarter has impacted the company.

New investors would do well to keep an eye on the company and any new external dependencies that might affect the company’s numbers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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