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. 

<img src="/media/images/user_16317/nrgy-table-1_large.PNG" />

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.

<img src="/media/images/user_16317/nrgy-table-2_large.PNG" />

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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