Danger Lurking in Blackstone Group Dividend Payout Ratio Analysis?

Blackstone helps break ground on a Hawaii project. Source: Blackstone

Dividend investors scour the stock universe for lucrative income opportunities from every corner of the corporate world. But sometimes, institutional investors themselves make attractive investments, and that's a big part of why Blackstone Group (BX) went public in the mid-2000s and developed a following among those seeking more income. Yet when you look at how much the private-equity company pays out in dividends, it raises some concerns about whether Blackstone can keep paying as much as it does. Let's take a closer look at Blackstone Group by doing a dividend payout ratio analysis to see if its healthy dividend yield is sustainable.

Dividend Stats on Blackstone Group

Source: Yahoo! Finance

Why should anyone worry about Blackstone's dividend?
At first glance, it seems ridiculous that anyone would be worried about Blackstone's dividends. After all, with just a 70% payout ratio, Blackstone would appear to ample margin of safety even if its earnings were to decline in the future, without having to cut its payout.

The problem, though, comes when you take a closer look at Blackstone's financial statements. For instance, in its third-quarter report, Blackstone reports that it has made $1.78 billion in distributions to unit holders in the first nine months of 2014. Based on roughly 610 million common units outstanding, that would equate to about $2.90 per unit -- well above the $1.48 per unit that Blackstone has declared. As a result, S&P Capital IQ reports a much higher payout ratio based on this higher distribution number.

Part of the confusion about Blackstone comes from the different ways in which it measures its performance. Specifically, Blackstone doesn't believe that generally accepted accounting principles do a good job of reflecting the private-equity firm's true success, and so it uses different metrics to assess itself. Its definition of Economic Income is equal to its pretax segment net income excluding transaction-related charges -- especially equity-based compensation, intangible asset amortization, and contingent payments connected to acquisitions. Economic Net Income takes taxes out of Economic Income, while Distributable Earnings takes Economic Net Income and adds together fees, investment-income revenue, realized performance fees, and realized investment income. Distributable Earnings then takes out compensation, performance-fee compensation, and taxes and other operating expenses. From there, you can establish net cash available for distribution by taking out those amounts that Blackstone deems necessary to invest in its own business.

Blackstone's Broadgate property in London. Source: Blackstone

Once you understand those metrics, Blackstone's distribution policy looks a lot simpler. Blackstone aims to distribute "substantially all" of its net cash available for distribution to investors in its common securities, making sure that it pays at least $0.12 per unit on a quarterly basis. That insures that investors get a minimum amount of income each quarter, and Blackstone then claws back from future earnings in order to make itself whole. In other words, the way that Blackstone defines its dividend strategy means it should never get into a long-term position in which it's paying out more than it can afford.

Focusing on fundamentals
Much of Blackstone's success has come from being willing to make big bets at opportune moments. For instance, in recent years, Blackstone spent billions buying up single-family properties, and the recovery in the housing market since the financial crisis has helped produce substantial profits for Blackstone. Overall, Blackstone's real-estate division has continued to drive overall results for the company, with $80 billion in assets under management and strong economic conditions in the industry helping to raise rental income and occupancy rates across its global portfolio.

Blackstone has also benefited from some of the companies that it has brought public in recent years. Real-estate giants Hilton Hotels (HLT -0.38%) and Brixmor Property Group (BRX 0.05%) are just a couple IPOs that have gotten a lot of attention from investors, and Blackstone's continuing interest in those companies means that it will keep benefiting if their shares rise further from current levels.

Looking forward, Blackstone expects to continue to find lucrative business opportunities in which to invest its customers' money. In particular, Blackstone isn't pulling back from overseas investments, with expectations to make as much as 50% of its future commitments beyond U.S. borders.

As long as the bull market continues to roar ahead, it's hard to foresee Blackstone having too much trouble sustaining its current income and dividend payments. Rising interest rates could start to have an impact on the profitability of its real-estate holdings, but with enough experience to have locked in favorable interest costs as long as possible, Blackstone should remain in position to reap the rewards of cheap financing for years to come.