Dividend Safety Analysis of Uniti Group Inc
It’s no secret that in the world of income investing, higher returns always come with higher risk. Very often, an ultra-high dividend yield turns out to be a sign of trouble. And yet whenever investors see a company offering a double-digit payout, it’s hard not to stop and take a second look.
So today, let’s take Uniti Group Inc (NASDAQ:UNIT), one of the highest-yielding names on U.S. stock exchanges, and examine its dividend safety.
Headquartered in Little Rock, Arkansas, Uniti Group Inc is a real estate investment trust (REIT). But instead of owning shopping malls and office buildings, the company focuses on a different set of assets: communications infrastructure.
As of December 31, 2017, Uniti Group’s portfolio consists of 667 wireless towers, 4.9 million strand miles of fiber, and other communications-related properties such as central office locations, rooftops, and land suitable for wireless tower construction. (Source: “Raymond James 39th Annual Institutional Investors Conference,” Uniti Group Inc, last accessed April 2, 2018.)
By structuring as a REIT, Uniti Group is required by law to distribute at least 90% of its profits to shareholders in the form of dividends. Right now, the company pays quarterly dividends of $0.60 per share, giving UNIT stock a jaw-dropping annual yield of 15.1%.
Usually, when evaluating a company’s dividend safety, analysts would look at its profits. However, in the real estate business, profits may not be the best metric to use because it includes items like depreciation expenses, which are typically not considered a cost of operating the business. So instead, I would use funds from operations, which is calculated by adding non-cash charges such as depreciation and amortization to net income.
In the fourth quarter of 2017, Uniti Group generated adjusted funds from operations of $112.4 million, or $0.64 per diluted share. This was more than enough to cover its quarterly dividend rate of $0.60 per share. (Source: “Uniti Group Inc. Reports Fourth Quarter and Full Year 2017 Results,” Uniti Group Inc, March 1, 2018.)
In full-year 2017, Uniti Group’s adjusted funds from operations came in at $424.9 million, or $2.51 per diluted share. Again, this provided more than enough coverage for its total dividends of $2.40 per share paid for the year.
Of course, conservative income investors would probably want to see an even wider margin of safety. But note that as a REIT, Uniti Group’s cash flows are backed by long-term contracts. For instance, in the Uniti Leasing segment, the company has approximately $8.4 billion of revenues under contract, with an average remaining contract length of 12.3 years. This should add stability to Uniti’s future cash flows and dividends.
Going forward, management expects the company to generate adjusted funds from operations of between $444.0 million and $453.0 million in full-year 2018. Its weighted average common shares outstanding are expected to be 176.2 million for the year. Based on these numbers, if Uniti achieves the midpoint of its guidance range, its adjusted funds from operations for 2018 would be $448.5 million, or $2.55 per diluted share. That should be enough to cover its current annual dividend payment of $2.40 per share.
As it stands, Uniti Group Inc’s 15.1% yield looks safe.