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Macquarie Infrastructure Corporation Message Board

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  • marklibera marklibera Apr 14, 2008 1:44 PM Flag

    Why are you guys buying a stock that pays out more than they make?

    I keep reading the same comments on these Yahoo message boards on several of the finance-based high yielding stocks, such as MIC and some of the MLPs and REITs and Canadian royalty trusts. Posters keep questioning how these companies can continue to pay out distributions greater than their reported GAAP earnings. The problem usually centers on three things:

    1) GAAP earnings vs. cashflow. GAAP requires the reporting of various non-cash charges that have the effect of reducing reported earnings. Cashflow is the true measure of whether a company has enough money coming in to pay its distributions. Many of these companies are buying physical assets (such as airports, airplanes, ships, pipelines, cemetaries) with definite cashflows. They buy the assets largely with borrowed money (the % varies on asset type). As long as finance costs are cheaper than the operating cashflow and there are no impairments (or defaults on underlying leases) then the company will be okay. Sometimes the companies securitize leased assets to lower their cost of funding. The banks won't finance 100% of the acquisition cost of more assets so these companies periodically have to raise funds through equity sales (or asset sales) in order to grow since they pay out a large proportion of their cash.

    2) Depreciation charges. The accounting rules and tax code allows companies to take charges (thereby reducing taxable income) for the depreciation. Many of these types of physical assets actually increase in value over time (or at least do not depreciate as fast as the depreciation charges taken) due to the scarcity value of the asset or the increased replacement cost. Inflation causes the cost of replacing the asset (labor plus materials) to increase, plus, in the case of assets that are leased, the leases could have inflation escalators that increase the cashflow to the company, thereby increasing the value of the asset.

    3) Derivatives. Many of these companies finance their asset purchases with floating rate bank debt and then enter into interest rate swap agreements to convert the floating liability to a fixed liability. Bank agreements are almost always of the floating kind because of how they match fund their assets. The accounting rules require that the swaps be marked to market each quarter even though the company has not realized a loss or a profit from the changes in swap rates. The mark-to-market could be a charge to earnings (if swap rates go down), but it has no effect on the companies' debt payments (which have been fixed with the swap agreement).

    The common thread among these types of companies is that they are choosing to pay out relatively high proportions of cash flow to their investors instead of retaining the money to reinvest in the business. More of an investors total return is coming from distributions instead of share increases. The companies hope that steady, increasing distributions will lead investors to pay more for that return, leading to increasing share prices.

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    • Interesting discussion. My only conclusion is that these high div plays are RISKY. Check out the chart on CVP. Even a hint of a div decrease will tank the stock.

      One major thing going for MIC is that management has been raising the div. Usually these high payouts are constant. It's unusual to find one that actually increases. This tells me that, at least for now, management is confident in what they are doing.

      For those new to world of extreme income investing, I can recommend the Alpine fund. I've owned it for a while.

      Good luck, UCS.

      • 1 Reply to uppercoastsierras
      • Not sure that CVP is a good comparison. I've heard about that on another board. That is one of those hybrid companies with a stock that has both a common stock and junk bond component. Their credit agreements probably restricted their ability to continue to pay large dividends. Plus, how great of a business is stadium concessions? True they charge exorbitant prices and have a captured audience, but they are exposed to food inflation and I'm sure the owners of the team get a percentage.

        MIC is investing in good cashflowing businesses and they only buy assets that can adequately cover their debt.

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