Macquarie Infrastructure Corp: This 10.3% Yield Is Worth a Look
A Double-Digit Yielder You Likely Haven’t Considered
Today I’m highlighting one of the most overlooked dividend stocks in today’s market: Macquarie Infrastructure Corp (NYSE:MIC).
As the name suggests, Macquarie is in the infrastructure business. It owns, operates, and invests in a diversified portfolio of infrastructure companies in the United States. By aggregating the cash generated from these businesses, Macquarie can provide shareholders with a generous stream of quarterly dividends.
Here are some of the notable names in Macquarie’s portfolio:
- Atlantic Aviation FBO Holdings LLC provides fuel, terminal, aircraft hangaring, and other services at 70 different locations
- International-Matex Tank Terminals (IMTT) is one of the largest independent bulk liquids terminal businesses in the United States. It provides storage and logistics services for over 48 million barrels of refined petroleum, chemical, and agricultural product tankage
- MIC Hawaii includes Hawaii Gas—the only utility gas distributor in the state—and other smaller businesses
- Contracted Power includes the “Bayonne Energy Center” power plant and a portfolio of renewable power generation facilities.
These infrastructure businesses may not seem that exciting, but they helped fuel Macquarie Infrastructure Corp’s dividend growth. From 2013 to 2017, MIC stock’s annual dividend increased from $3.35 per share to $5.56 per share, translating to a compound annual growth rate (CAGR) of 13.5%. (Source: “Distributions,” Macquarie Infrastructure Corp, last accessed April 24, 2018.)
However, in the company’s most recent earnings report, management announced that they have decided to reduce their 2018 dividend to a quarterly rate of $1.00 per share. That’s quite a drop from Macquarie’s previous quarterly payout of $1.44 per share. (Source: “MIC Reports 2017 Financial Results, Increase in Quarterly Dividend,” Macquarie Infrastructure Corp, February 21, 2018.)
Now, I know what you are thinking: “Why would income investors consider a company that has just cut its payout?”
Well, the answer lies in the reason behind MIC’s dividend cut. Macquarie’s management decided to reduce the company’s payout not because the business was deteriorating, but because they wanted to fund the repurposing of the IMTT assets internally and take advantage of the recent tax reform.
In its latest investor presentation, Macquarie showed that, when the company has $100.00 of taxable income, $100.00 of cash, and $100.00 of pre-tax earnings and profit, it would have $60.20 of post-tax cash available for shareholders if it decides to pay that post-tax cash as a dividend. (Source: “Fourth Quarter 2017 Earnings Conference Call Support Slides,” Macquarie Infrastructure Corp, last accessed April 24, 2018.)
If the company decides to reinvest that $100.00 in property that qualifies for the 100% bonus depreciation, the post-tax cash it can reinvest would be the entire $100.00.
In other words, there’s a strong incentive for the company to reinvest its cash as opposed to paying it all out as dividends.
And if you take a look at what Macquarie has actually been doing, you’d see that its financials are more than solid. In the fourth quarter of 2017, the company generated $135.5 million of adjusted free cash flow, representing a 14.2% increase from the $118.6 million earned in the year-ago period. In full-year 2017, Macquarie’s adjusted free cash flow totaled $568.0 million, up 11.3% from 2016.
Moreover, the dividends declared for 2017 represented just 81.4% of the company’s adjusted free cash flow earned during the year. Since the new dividend rate is lower, Macquarie should have no problem covering its payout for 2018 if it generates a similar amount of free cash flow as in the previous year.
At the end of the day, markets don’t like dividend cuts, and the MIC stock price has plunged big-time since the company’s announcement. But since dividend yield moves inversely to share price, the company’s reduced quarterly payout of $1.00 per share still translates to a forward annual yield of 10.3%.
For investors looking to boost the returns of their income portfolios, Macquarie Infrastructure Corp’s double-digit payout could be an opportunity.