Tom Konrad CFA
After the close on Thursday, November 7th, Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI) declared third quarter earnings. Results were in-line with my, and other analysts’ expectations: Earnings per share (EPS) of 14 cents, and a declared dividend of 14 cents as well. This more than doubled the second quarter’s 7 cent EPS and 6 cent dividend. Note: I have a large long position in HASI.
HASI remains on track to reach managements’ dividend target of “over 7% of the $12.50 IPO price” (22 cents a quarter,) and provided some additional guidance for future dividends. Brendon Herron, HASI’s Chief Financial Officer said that investors can expect the dividend to grow between 13% and 15% for the next couple of years, based on the 22 cent fourth quarter target.
Putting some numbers to the dividend guidance, at Friday’s closing price of $11.69, a 22 cent fourth quarter dividend would equate to a 7.5% annualized yield. 13% to 15% annual dividend growth would provide an annualized yield of 8.5% to 8.6% in Q4 2014, and 9.6% to 10% in 2015, assuming the share price does not increase.
Why The Decline?
Despite delivering on the company’s promises, the stock fell 5% from its Thursday $12.30 close, returning to levels it had last seen in mid-October, as it recovered from early-October lows. I attribute those lows to investor worries about the federal government shut-down. (Incidentally, I was buying in early October. While much of HASI’s business is with the federal government, federal cost cutting is more likely to be a driver of HASI’s money-saving investments than a drag in the long term. In the short term, federal projects may be delayed, but the company can make up the difference from other sectors in its vast pipeline.)
The most likely reason for the decline was selling by IPO investors. Approximately 2 million, or 13% of outstanding shares, became eligible for sale in October. Many of these IPO investors have doubtless been disappointed that the company has been consistently trading below the $12.50 IPO price, and were hoping the fourth quarter earnings announcement would provide an exit.
With an average share volume of less than 100,000 shares, it would not take much selling by short term IPO investors to drag the stock price down for several weeks. In contrast. the long term income investors who are likely to be attracted by HASI’s future yield tend to move more slowly. I expect they will eventually bring the price back up as they recognize the value of HASI’s current 4.8% annualized yield and forward 7.5%+ yield, but we can’t expect this to happen overnight.
Note that company insiders are still restricted from selling. However, I don’t expect them to sell many shares when they are released from lock up. According to SEC filings, company officers (most notably the CEO, Jeffery Eckel) have purchased over 50,000 shares since the IPO at prices between $10.99 and $11.76. I would not be surprised if they are buying today.
Hannon Armstrong’s fall on Friday was most likely due to selling by IPO investors who were released from lock-up restrictions in mid-October. If only a fraction of these investors try to sell their shares over the next few weeks, it could easily drive the stock down further given HASI’s low trading volume.
Long term investors and traders willing to hold a position for at least six months should take note. Given the extremely reliable nature of its investment income, buying Hannon Armstrong at any price below $12 is not only likely to produce some capital gains as they reach their full dividend, but the 14 cent thirdquarter dividend should provide a floor for the stock price. At $12, its annual yield is 4.7%, which is already in line with comparable US-listed stocks. If selling by short term IPO investors is driving the stock down, it is a buying opportunity, not a reason to panic.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.