At first glance Macquarie Infrastructure Corporation (MIC) seems like the perfect high-yield dividend growth stock. After all, over the past four years it's grown its dividend at a compound annual rate of 53.5%, and since the financial crisis ended it has absolutely crushed the overall market.
MIC Total Return Price data by YCharts
You may think that huge gains like this are beneficial to everyone involved, but the way Maquerie Infrastructure incentivizes its management makes this stock look much less attractive for individual investors. Let's take a look at the company pays its management, and more importantly, whether it's bad enough that long-term dividend investors should avoid the stock despite its amazing recent performance.
Great, diversified business model, but ...
Macquarie Infrastructure Corp operates in four deep-moat industries, and it secures it revenue by inflation adjusted long-term contracts in several regulated industries:
- 12 marine bulk petroleum and storage terminals, with total capacity of 45 million barrels.
- Aircraft servicing at 69 U.S. airports.
- Controlling interest in seven solar- and wind-power generation projects, with revenue secured by 20- to 25-year contracts.
- Gas processing and distribution services serving 69,000 total customers in Hawaii.
However, dividend investors primarily care about three things: yield, dividend security, and long-term dividend growth potential, and it's these last two factors that are potentially threatened by how the company's management compensation is structured.
... the fee arrangement makes it essentially run like a utility hedge fund, meaning ...
According to its latest 10-K, Macquarie Infrastructure Corp. is externally managed by Macquarie Infrastructure Management, which is part of the Macquarie Group, an Australia-based provider of "financial, advisory and investment services ... on behalf of third-party investors."
What all that means is that the management of Macquarie Infrastructure Corp. doesn't necessarily put its shareholders' interests first, because the way its management fees are generated makes it run like a hedge fund.
Specifically, management is paid a quarterly base fee -- paid monthly -- of $5 million plus 0.25% of net investment value, which is defined in the prospectus as market cap plus debt plus the next two quarters' investment commitments, minus cash on the balance sheet. In addition, there is a quarterly performance bonus of 20% of its stock's positive total return performance relative to the total return of the U.S. Utility index, potentially resulting in hundreds of millions of dollars in annual fees.
... management is working primarily for itself and not long-term dividend investors
From the Macquarie Infrastructure Corp 10-K:
The size of the {management} fee may bear no direct correlation with the actual cost of providing the agreed upon services and may be higher than the cost of managing the company internally. Per the terms of the Management Services Agreement with our Manager, the default manner for satisfying any base or performance fees to which the Manager may be entitled is the issuance of additional shares. To the extent the fee continues to be satisfied with the delivery of additional shares, all shareholders are diluted and our hurdle for growing distributable cash on a per share basis will be higher.
This quote -- italics are added by me for specific emphasis -- shows the importance of performing due diligence by reading your investment's 10-K filings because it basically spells out my biggest problem with Macquarie Infrastructure. Like many externally managed asset managers, they appear more concerned with paying themselves than their investors.
MIC Market Cap data by YCharts
For example, because of Macquarie Infrastructure's strong stock performance over the past year -- as well as plenty of equity issuances used to pay for acquisitions that inflated the market cap -- management was able to pay itself a record $401 million in performance fees in addition to $63.5 million in base management fees. These were in the form of $68 million in cash and nearly 3.5 million shares, which diluted shareholders to the tune of 6.1%.
My problem with this is management paid itself 29% of the last 12 months' revenue in fees, 86% of which were based on short-term stock performance that could reverse itself during a market correction. Meanwhile, the shares issued to pay these fees resulted in permanent investor dilution that might make long-term dividend sustainability and growth more difficult.
Takeaway: Performance fee arrangement doesn't align management's interests with long-term shareholders
Paying top dollar for quality management isn't necessarily a bad thing, and I'll admit that Macquarie Infrastructure's total returns over the past few years have been very impressive.
That being said, past results don't guarantee superior future returns, and the performance fee's focus on short-term stock gains at the cost of permanent shareholder dilution should make long-term dividend investors think long and hard before risking their hard-earned money in this stock.
