Where is Inergy getting the money to pay its dividends?

Ronak is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At Inergy's (NYSE: NRGY) current price of $20.14, the stock yield’s a rather respectable 5.9%. The company has been paying varying amounts of dividends since at least 2002 and everything seems fine - until we take a closer look.

As shown in Table 1, Inergy’s total earnings over the past five years amount to $641 million and the net change in its long term debt was an increase of $50 million. If you disregard the one-time gain of $519 million that Inergy recorded in 2012 from the sale of its retail propane operations, the net income falls to an exceedingly modest $122 million.

Over the same time span, Inergy paid out a total of $810 million in dividends and spent $967 million on capital expenditures.

Adding up the numbers results in a net deficit of a little over a billion dollars! Indeed, Inergy spent more than it earned in three out of the last five years. 

Where then did this extra money come from? It came from the only other source of money available to the company: new shareholders. Over the past 5 years, Inergy has raised a total of $1.2 billion by issuing new shares – enough to cover the deficit with a little bit of cash left over [Table 2]. The number of Inergy shares outstanding has more than doubled since 2008.

It appears that Inergy has been funding its generous dividends by borrowing from new investors. The whole deal seems a lot like a ponzi scheme. Perhaps it’s time to sell before things suddenly take a turn for the worse...

Fool blogger Ronak Patel does not own shares in any of the companies mentioned in this entry.

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