Image courtesy of Macquarie Infrastructure Corp.

Nothing makes income investors happier than to see nice, fat dividend increases. So they'd probably admire Macquarie Infrastructure Corporation's (NYSE: MIC) just-reported fantastic earnings, giving dividend lovers some very happy news. Yet despite the superb results, two risk factors remain that long-term investors need to be aware of -- risk factors that threaten to slow or even cut off Macquarie Infrastructure's payout growth in the years to come.

Impressive results

MetricQ3 2015Q3 2014YOY Change
Revenue $416 million  $389 million 7%
EBITDA $163 million $109 million 50%
Proportionally Combined Free Cash Flow (FCF) $92.8 million $49.9 million  86%
FCF/Share $1.17 $0.73 60%
Quarterly Dividend $1.13 $0.98  15%
Dividend Coverage Ratio 1.04 0.74 41%

Data source: Macquarie Infrastructure Corp. earnings release.

Macquarie Infrastructure Corp. had a very good quarter. This growth was primarily a result of its July 2014 acquisition of the remaining 50% stake in International-Matex Tank Terminals.

Further growth came from acquisitions in the company's contracted power and energy division. Specifically, these included its April purchase of Bayonne Energy Center, as well as some wind power facilities in the second half of 2014.

Such impressive results seem to bode well for Macquarie's dividend growth prospects. That's especially true given that the company's free cash flow, which is an approximation for cash available to pay the dividend, is booming. However, looks can be deceiving. 

Dividend profile isn't as great as it seems

Yield9-Month Dividend Coverage Ratio2-Year Dividend Growth Guidance
5.7% 1.14 14%

Data source: Macquarie Infrastructure Corp. earnings release.

At first glance, Macquarie Infrastructure seems to offer income investors an ideal dividend profile. The generous yield seems well supported by free cash flows. Meanwhile, management's payout growth targets tantalize with the prospect of substantial income growth, along with total returns in the years to come. 

The problem is that the company's dividend may not be as safe as it looks. Macquarie's FCF calculations leave some important things out. According to the company's earnings release, "Free cash flow does not fully reflect MIC's ability to freely deploy generated cash, as it does not reflect required payments on indebtedness and other fixed obligations or the other cash items excluded when calculating free cash flow."

In other words, while FCF does include operating cash flow, taxes, interest paid, pension obligations, and maintenance capital costs, it excludes some important cash expenses such as debt repayment costs.

When one accounts for the current portion of its long-term debt over the past nine months, Macquarie Infrastructure's actual dividend coverage ratio this year is closer to 1.1. Normally a coverage ratio of 1.1 can sustain decent dividend growth. However, this quarter's coverage ratio was just 0.98 because of the large size of the dividend increase, and a 17% jump in share count over the past year. 

While true that any one quarter's DCR decline can be mostly due to seasonal effects, the fact that CEO James Hooke's reiterated Macquarie Infrastructure's previous dividend growth guidance, makes me concerned that Macquarie's future payout growth may come at the expense of dividend sustainability. That's because management may feel pressured to keep the dividend growth aggressive in order to drive share price growth because that massively benefit its pay package. 

Two big risks investors need to keep an eye on
To keep growing its dividend, Macquarie Infrastructure needs to constantly expand its asset base through organic growth projects and acquisitions. The company's long-term plan is to pay out 75% to 85% of its free cash flow as dividends. Thus as with many infrastructure and MLP type investments, debt and equity financing will have to make up the vast majority of its growth capital needs.

The problem is that Macquarie already has $2.83 billion in total debt. Thanks to a shareholder-unfriendly management fee structure during the first half of 2015, Macquarie decimated its EBITDA by paying $320 million in management fees and creating a trailing-12-month debt-to-EBITDA ratio of 16.8. 

Macquarie does have almost $1.2 billion in untapped borrowing power under its existing credit facilities. However, its existing debt covenants could greatly limit its ability to actually borrow those funds.

What's more, the company's heavy debt load is a direct threat to the dividend. If anyone of Macquarie Infrastructure's business units breaches its debt covenants, its creditors can immediately call in their loans for that segment and potentially force a reduction or even suspension of the dividend. 

At the end of 2014 one such segment, Hawaii Gas, was was closing in on the danger zone of one of its covenants. It's debt-to-capitalization ratio cannot go above 65% and nine months ago its stood at 61.7%. Since the company doesn't break out individual business segment debt loads in its quarterly filings, investors can't know how this metric has changed until the next 10-K is released in February of 2016. 

Meanwhile, equity financing only works well as long as Macquarie's share price is trending up. When bear markets or stock market corrections inevitably strike, equity funding will become increasingly more dilutive. That, in turn, will hurt the company's ability to grow its dividend in the future. 

Bottom line: Fast dividend growth requires that cheap debt keep flowing, and the share price keep growing
Macquarie Infrastructure Corp. is experiencing impressive dividend growth right now. However, investors need to be aware that this growth may not be sustainable because of management's dilutive fee structure, and the company's heavy debt burden.

Adam Galas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.