#-ad_banner-#As the long-running bull market shows signs of tiring, investors are searching for pockets of safety. But even seemingly safe stocks may not always provide a refuge.

A clear example: StoneMor Partners LP (NYSE: STON), the nation’s second-largest owner and operator cemeteries and funeral homes, has announced modest dividend increases every year for a decade. But that impressive run may soon end.

At first glance, this master limited partnership holds solid appeal. Partnership units currently yield an attention-grabbing 8.2%, and yields have ranged from about 7% to nearly 18% since 2005.

However, StoneMor’s operational results tell a different story. The firm has been unprofitable for nearly seven years, posting per-share losses ranging from $0.09-to-$0.89. And it’s unlikely to get back into the black anytime soon for several reasons.

Overpriced Acquisitions
Cemeteries and funeral homes are dependable, but stagnant businesses. As a result, StoneMor has only been able to grow through acquisitions. From 2010 through 2014, the firm obtained nearly 90 properties, about half of which were cemeteries.

The strategy successfully increased the top line, which has risen 46% in the past five years, to $288 million. However, StoneMor spent $153 million to acquire that additional $91 million of revenue.

Deal-making has recently slowed, which presents another conundrum: without sufficient acquisitions, revenue growth is apt to slow considerably.

High Costs, Rising Debt
StoneMor’s operating costs are enormous, typically consuming well over 70% of revenue and rising by more than 7% annually. Not much can be done about this without sacrificing competitiveness. The bulk of these outlays are for various forms of advertising; expanding, training and compensating a large salesforce; and cemetery and funeral home-related costs.

With negative earnings and high fixed costs, StoneMor has been assuming large amounts of long-term debt. This more than tripled in the past decade to almost $300 million, as of this year’s first quarter (Q2 results will be released on August 10).

A key concern for shareholders: a pair of scheduled debt re-payments. These include the nearly $123 million balance on a credit facility that matures in June 2019 and $175 million in 7.9% senior notes due two years later.

The fact that those deadlines are years off is immaterial since StoneMor never has much cash. Over the past decade, cash on the balance sheet has only averaged about $10 million annually, while free cash flow was typically only around $9 million a year. Both metrics are at roughly those levels now. At about $21 million annually, interest payments alone often exceed available liquidity.

To boost cash, StoneMor often resorts to public equity offerings. These have substantially diluted the stakes of existing shareholders by more than tripling the number of outstanding partnership units to 28 million over the past decade.

The latest offering, which occurred earlier this month, yielded net proceeds of about $59 million from 2.1 million new partnership units. Based on those results, StoneMor will clearly have to tap the capital markets numerous times in the coming years to fund operations and pay off debt. And future public offerings may not be nearly as successful if investors lose tolerance for further dilution.

Unfavorable Trend
The last thing StoneMor needs now is weaker industry fundamentals, but that’s what’s in store. According to data from the National Funeral Directors Association, consumers are increasingly opting for cremation, which generates about half as much revenue as traditional funerals and carries much lower profit margins.

Last year, post-mortem services were about evenly split between cremation and funerals. However, cremation will account for about 56% of these services by 2020 and more than 70% by 2030, the association projects. StoneMor’s management acknowledges this risk, which is apt to crimp cash flow and force even greater reliance on debt and potentially disappointing public offerings.

Risks To Consider: As an upside risk, the number of deaths in America is expected to gradually rise as the baby boom generation reaches old age. For StoneMor, this could translate into a greater volume of business that helps to mitigate the risks associated with the rise in cremations.

Action To Take –> Don’t be drawn in by the high yield of StoneMor Partners. It’s a big stretch for the firm to make its dividend payments under current circumstances, let alone the more challenging environment that’s unfolding.

Thus, the risk of future dividend reductions is unacceptably high. Indeed, I wouldn’t be surprised to see a dividend cut within 12-to-18 months, especially if StoneMor loses favor with the capital markets. This would likely trigger a nasty drop in the value of partnership units, as well.

Avoid this stock and depending on your risk tolerance, consider opening a short position.

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