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Rodney Dangerfield couldn’t get respect. The same is true for Macquarie Infrastructure (NYSE: MIC).
Macquarie, a company whose name describes its business, raised its latest quarterly dividend to $1.42 per share this month. This marked the 16th consecutive quarterly dividend increase. The increase lifts the Macquarie dividend yield to 8.7%.
There is more to the high-yield drama than a series of rising dividends. The high yield is also the function of a series of investor sell-offs. Macquarie’s shares are down 20% year to date.
The downdraft in share price is a head-scratcher. Macquarie owns a portfolio of infrastructure businesses. What’s more, they’re infrastructure businesses with staying power.
The portfolio consists of an airport services (FBO) business; one of the largest bulk-liquid terminal businesses in the United States; a gas processing and distribution business; and a host of contracted power and energy investments consisting of ownership of gas-fired power plants and controlling interests in wind and solar power facilities.
Basic stuff, to be sure, but essential stuff. Modern life would be more Hades than heaven without such infrastructure.
MacQuarie Dividend Declaration
Macquarie owns a solid business portfolio. When Macquarie declared its latest quarterly dividend, its shares dropped 6%. The shares continue to hold near low ground to this day. Talk about getting no respect.
Perhaps investors were too consumed by earnings. The dividend declaration was tethered to the quarterly financial report. Earnings in the report apparently left many investors stone-faced.
Macquarie reported $36.2 million in third-quarter net income compared with $42.5 million in the year-ago quarter. That’s a 14.8% decrease. Operations weren’t the issue, hedging the operations was.
The decrease reflected unrealized non-cash losses on interest-rate hedging contracts. The same contracts produced a profit a year ago. When you take the long view, you’ll find that net income is actually up 13.3% through the trailing nine months.
Earnings should really be the secondary consideration, anyway. In most quarters, EPS fails to cover the dividend. The latest quarter was no different. Macquarie reported EPS of $0.48. The latest quarterly dividend was $1.42.
How can it be? How can Macquarie continually pay a dividend that exceeds earnings?
It’s the nature of the business. Like a MLP, REIT, or BDC, Macquarie is built to manufacture shareholder income first. Macquarie owns a lot of assets that generate a lot of non-cash expenses. The non-cash expenses depress earnings, but not cash flow.
As for cash flow, Macquarie reported $144.4 million and $432.4 million of free cash flow in the quarter and year-to-date periods. These are 9.5% and 10.4% respective increases compared with prior-year periods.
Strong Cash Flow
The cash should continue to flow unimpeded in 2018. I expect it to flow at a higher level as well.
Macquarie will provide full-year 2018 guidance early next year. Management has already said it expects to “benefit” from growth capital deployed this year. I interpret “benefit” as a continual rise in quarterly dividends.
If the cash flows higher, you can be sure the dividend will flow higher too. The corporate goal is to distribute 75% to 85% of free cash flow to shareholders. The ancillary goal is to increase the flow 10% annually.
I give Macquarie respect, even if the market won’t. If you’re an income investor in search of high yield and relentless dividend growth, you should give Macquarie respect, too.
You should also consider opening a spot in your income portfolio.
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