OUCH! This one caught me by surprise. Aircastle, Ltd. (NYSE:AYR) is cutting its dividend from 25¢ to 10¢ for the 4th quarter. I had considered the dividend pretty secure since the company is generating around $1.10 free cash flow per quarter.
I see a couple of reasons for the board’s decision to reduce the dividend. First, the stated purpose of conserving cash is probably linked to the company’s order of 12 new Airbus A330s. The first of these will be coming in 2010 but the company needs to make $120 million in pre-delivery payments in 2009. It plans on financing about 2/3 of the cost of the new jets, but may want to have more equity available to reduce the amount of borrowing.
In the recent earnings conference calls I got the impression that company management was not happy with the way the market was treating the shares and felt that if the dividend payout was not helping to prop up the shares, it could find a better use for the cash. I think this line of reasoning short changes shareholders who have held on during the financial crisis with the understanding the company was solvent and would continue to support the dividend.
If management’s assertion that their cash flow remains strong is true, I hope to see some announcements in the near future concerning the company’s attempt to improve the business. This is from yesterday’s press release (emphasis added):
Aircastle CEO Ron Wainshal commented, “The company’s cash flow remains strong. However, in light of the unprecedented turmoil in the financial markets and current uncertainties in the global economy, we believe retaining cash is a prudent step which will strengthen Aircastle’s balance sheet, enhance our financial flexibility and enable the company to take advantage of attractive investment opportunities.“
Although I like Aircastle’s business model, I do not see much value in the stock until either 1) perception of the global economy changes to the positive or 2) the company takes a positive step to increase shareholder value. The perception of the market is that Aircastle is at risk due to its level of debt and exposure to the economic slowdown. I am pretty sure this is not true, but I do not think the market has the same view I do. Right now I see no compelling reason to hold the stock.