BGC Partners Has Positive Dividend News, Plans Real Estate Brokerage Acquisition
BGC Partners BGCP reported net income available to common shareholders of $8.7 million, or $0.09 per fully diluted share, on $365 million of revenue for the first quarter of 2011. Revenue grew 13% sequentially, primarily from strong rates and credit trading. Interest-rate derivatives continue to be an area of strength for the company, comprising 45% of total brokerage revenue, as high levels of sovereign and corporate debt issuance and the related need to hedge or speculate on changes in interest rates drive rate derivative trading volumes. We expect to maintain or increase our fair value estimate for BGC Partners as we reevaluate our broker productivity assumption.
One of the advantages of the merger between the BGC division of Cantor Fitzgerald and eSpeed that created BGC Partners was the synergy from high-touch voice brokerage and a strong electronic trading platform. This synergy could provide an opportunity via the operation of a swap execution facility (SEF) that will be part of the financial market infrastructure after the full implementation of Dodd-Frank derivatives reform. More electronic trading should reduce compensation costs over time, but it currently comprises less than 15% of brokerage revenues, so there's still a ways to go. Additionally, implementation of Dodd-Frank derivatives reform is continually delayed, so we may have to wait until the end of 2012 before we see how successful BGC Partners' SEF will be. We also caution that other SEFs can be a material threat, because if a network effect develops at another SEF, then it would have a competitive advantage for gaining market share.
BGC Partners recently announced it will acquire much of the U.S. business of commercial real estate advisor Newmark Knight Frank. The company believes that the commercial real estate brokerage business should be able to leverage its existing infrastructure and client relationships. BGC Partners also plans to use the acquisition to develop a property derivatives business.
BGC Partners is increasing its quarterly dividend to $0.17 per share from $0.14. The company also said that it plans to keep this dividend steady for the rest of 2011, whereas previously the quarterly dividend could fluctuate based on its calculation of non-GAAP distributable earnings. Moreover, management stated that it expects at least 50% of the dividend will be a nontaxable return of capital. As a reminder, a nontaxable return of capital decreases an investor's cost basis in the shares and could be taxable when the shares are sold.