In the comments section of last week’s Safety Net column, quite a few readers asked me to take a look at the dividend safety of FLY Leasing Limited (NYSE: FLY). Fly Leasing is an Ireland-based company that leases commercial jets.
The stock has a robust 6.4% yield, and it pays $0.22 per share on a quarterly basis.
In the first six months of the year, the company’s revenue and net income were down slightly.
[ad#Google Adsense 336×280-IA]But as you well know by now if you’ve read these Safety Net columns before, I’m more interested in cash flow because it is a more accurate representation of a company’s ability to pay the dividend.
Despite the lower top and bottom line numbers, cash flow from operations was actually higher in the first half of the year.
The company generated $96.7 million in cash flow from operations versus $92.2 million the year before.
However, free cash flow was negative during the first half of 2013 as the company spent $130 million on new flight equipment while it sold $30 million worth of airplanes. Last year, free cash flow was $23.7 million during the same period.
So let’s take a look at the prior year’s results to see if the company normally generates any free cash flow.
In 2012, Fly Leasing brought in $180.4 million in cash flow from operations. In the two years prior, cash flow from operations totaled $110.3 million and $115.2 million
In each of those years, the company purchased $50.8 million, $52.1 million and $41.6 million in flight equipment, respectively. In all three years, its sales of aircraft were higher than its purchases. You can see the free cash flow totals in the table below. All numbers are in millions.
So, in the past three years, the company generated between $170 million and $180 million in free cash flow per year, making the negative free cash flow of the first half of this year an anomaly. That being said, investors should definitely keep an eye on it and see if it has improved in the next year.
Over those three years, the company paid dividends of $21.6 million, $20.7 million and $22.4 million, respectively. Free cash flow easily covered the dividend. Last year, the payout ratio was just 12%.
Fly Leasing will pay out more in dividends this year than it did last year. The company raised the dividend halfway through 2012. More importantly, this year, Fly Leasing sold 13.1 million shares in July. Assuming the dividend stays the same that will mean an extra $2.9 million per quarter in dividend payments.
As long as the company returns to historical norms in terms of free cash flow, that’s not a problem at all. But if it’s not able to generate the kind of free cash flow that it has in the past, the dividend could be difficult to maintain.
Fly Leasing has paid a dividend every quarter since it went public in 2007. Unfortunately, that was right before the economic collapse and Fly Leasing was forced to cut its dividend by more than half in early 2009, from $2.00 per year to $0.80. In July of this year, it boosted its dividend by 10% to $0.88, annually.
The company gets dinged on its Safety Rating because it has cut the dividend in the recent past. A-rated companies never cut their dividends. The short term free cash flow situation is a little bit of a concern as well.
Therefore, this dividend is moderately safe. If free cash flow returns to previous levels, there’s a low risk of a dividend cut. But until then, I have to say there is some risk of a cut in the future.
Dividend Safety Rating: C
— Marc Lichtenfeld
Source: Wealthy Retirement