Shares of real estate investment trust (REIT) Hannon Armstrong (NYSE:HASI) rose as much as 17% in the first half-hour of trading on Friday. That said, the stock pulled back to a still-notable gain of roughly 12% by 10 a.m. EST. The big story was the earnings report, which came out after the close yesterday.
Hannon Armstrong describes its approach as investing in climate-change solutions. That effectively means the REIT is a play in renewable power, which is a very hot space today. It is also focusing heavily on growth, closing $1.9 billion in transactions in 2020, up nearly 50% from 2019. Fourth-quarter distributable earnings fell 7.5% year over year in the fourth quarter, but the company beat analyst estimates. And the full-year figure was up nearly 11%, so by and large, the REIT is living up to high investor expectations.
In addition, Hannon Armstrong announced that it was increasing its dividend by 3% in the first quarter. While that's not exactly a huge figure, it shows a commitment to returning value to shareholders via regular dividend increases. Assuming the new level holds throughout the year, it will mark the third consecutive annual dividend increase.
And there's every reason to believe Hannon Armstrong will be able to support the higher payment, since management is targeting distributable earnings-per-share growth of 7% to 10% annually from 2021 to 2023. No wonder investors were excited by the news here.
So Hannon Armstrong is operating in a hot sector and appears to be executing well. Only there's one problem that investors need to consider pretty carefully: valuation. The REIT's success is no secret, and the dividend yield is a somewhat miserly 2.4%, near the lowest levels in company history. The shares are up roughly 200% since April of 2020, around the low point of the coronavirus-driven bear market, nearly four times the gain of the S&P 500 Index over the same span. It might be prudent to tread with caution.