Dividend Growth That Starts With a 7% Yield

It’s usually one or the other: Dividend growth and a low yield, or high yield with no dividend growth.
Rare is the company that offers dividend growth with a high starting yield.
Macquarie Infrastructure (NYSE: MIC) is one of the rarities. It offers established dividend growth that starts with an immediate 7% yield.
What’s more, we’re not talking about dividend growth as an annual event, as is the norm with most dividend growers. For Macquarie, it has been 11 consecutive quarters and 11 consecutive dividend increases. The quarterly dividend was $0.69 per share to start 2013; the quarterly dividend is $1.15 per share to start 2016. That’s 18.5% average annualized dividend growth.
So, what does Macquarie do to generate such munificent dividends? Infrastructure, after all, is a broad, inclusive word. For most people, it conjures images of massive road, bridge or utility construction.
Infrastructure doesn’t quite work that way for Macquarie. Infrastructure as it applies to Macquarie includes fixed-based operations that cater to airports; bulk liquid storage terminals; natural gas and propane distribution; and power generation, both natural gas and alternative. It’s an eclectic mix, but the enterprise is basically led by two divisions.
Atlantic Aviation is one division. It provides fuel, terminal, aircraft hangaring, and other services to owners and operators of general aviation (GA) aircraft. International-Matex Tank Terminals is the other division. It provides bulk liquid storage, handling and other services to third parties at 10 marine terminals in the United States and two in Canada. Together these two divisions accounted for $1.3 billion of Macquarie’s $1.6 billion in revenue for 2015.
Macquarie also stands apart by its business formation. For most of its history, Macquarie operated as a limited liability company. It was basically a pass-through entity. Last year, it converted to a regular C-corporation, though it’s still run like a pass-through entity.
Macquarie Infrastructure is externally managed by a subsidiary of Macquarie Group. External management is frequently the norm for pass-through entities like MLPs and REITs. Macquarie’s mission is also similar to the mission of most pass-through entities. Management’s goal is to distribute a significant portion of Macquarie’s cash flow – 75% to 85% – to shareholders as dividends.
Because Macquarie acts like a pass-through entity, it should be treated like one. Cash flow, therefore, is the focus. Indeed, because of high depreciation and amortization expenses, Macquarie frequently posts operating losses, not earnings.
If we focus on cash flow – free cash flow in particular – we see impressive growth.
Macquarie ended 2013 with $196.9 million in free cash flow. It ended last year with $398.6 million in free cash flow. Over the same period, shares outstanding increased to 78 million from 51 million. Yes, Macquarie has issued more shares to grow the business, but cash flow per share has risen to $5.11 to end 2015 compared to $3.83 to end 2013.
Free cash flow per share should continue to rise in 2016. Most likely it will post at $6 or higher. Management recently guided to deliver between $5.00 and $5.10 per share in dividends for 2016. At a minimum, investors are looking at a 15.5% year-over-year dividend increase.
Macquarie shares yield 7% on today’s price. This time next year, the yield should be closer to 8% on today’s price. But I don’t see Macquarie shares remaining at today’s price indefinitely. I see them moving higher. As most dividend-growth investors are aware, as the dividend goes, so too goes share price.