Investors did not like Hannon Armstrong’s (NYSE: HASI) fourth quarter earnings announcement last night. While core earnings were a little weaker than expected, that is not what has the stock trading down 11% today. What shocked investors is the fact that the company did not raise the dividend this year for the first time since the REIT went public, and it gave 3 year guidance which likely disappointed many investors.
Last month, I wrote,
I expect that Hannon Armstrong will continue to be a well run and conservative business in 2018, and that management will raise the dividend at the lower end of my predicted range this quarter. The low dividend growth will probably cause the stock to trade flat to slightly down for most of 2018, and patient investors will see excellent buying opportunities in the latter half of 2018.
It turns out that management decided to be even more conservative with its dividend than I expected. (I expected a two cent increase to $0.35, which I thought would disappoint the market.)
Guidance Shock
The new guidance is for “total shareholder returns, on a compounded annual basis over the next 3 years, in the 8% – 12% range.” That means that the company is targeting dividend yield plus dividend growth around 10%. When this guidance was announced, the stock was at $21, so the yield was 6.3 percent, putting target dividend growth at 2 percent to six percent.
The last dividend increase was 10 percent, and I expected a 6 percent increase this year. I think most investors expected an 8 percent to 10 percent increase (which is why I though 6 percent would disappoint.) Clearly, no increase this year and 2 to 6 percent increases in coming years were a shock given these expectations.
Valuation
With the stock currently down 11% at $18.50, investors should upgrade expected future returns. First of all, there is nothing fundamentally wrong with Hannon Armstrong’s business model: The company has simply sacrificed current income in order to better prepare for a rising interest rate environment.
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