Change in Distribution Policy Not a Concern for Blackstone

| About: The Blackstone (BX)

After reading its earnings release, I noticed an interesting note out of The Blackstone Group (NYSE:BX) concerning the distribution. For FY 2011, the firm plans on distributing

to its common unitholders substantially all of The Blackstone Group L.P.'s net after-tax share of annual Distributable Earnings less the amount of its realized investment gains.

This is a change from last year, when the firm did not make this deduction. The release says Blackstone sees potential to invest the money back into its business, and the amount will be deducted from the fourth quarter distribution. Blackstone's policy is to base the first three quarterly distributions on assumptions as to what the year's distributable earnings will be, and then distribute the remainder of the distributable earnings in the fourth quarter. Right now the company is paying $0.10 a share for the first three quarters, and a larger payment for the last quarter. For FY 2010, the fourth quarter distribution was $0.32.

For 2010, Blackstone reported $701,784,000 in distributable earnings. Of that number, the vast majority was from either Net Fee Related Earnings from Operations (63%), and Total Performance Fees, Net of Compensation (33%). Realized Investment Income for 2010 was only $46,915,000, and after Adjustments and Other Payables were subtracted that segment's contribution to distributable earnings was down to $26,123,000 (3.7%). A reduction of the Q4 distribution by 3.7% last year would have amounted to a decrease of $0.011.

Clearly, the change in distribution policy makes for a worse headline than it actually ends up being for unitholders. By retaining realized investment gains, Blackstone will be able to re-deploy the capital to other ventures, adding additional funds for investing to the firm's massive horde of cash, referred to as dry powder.

As Blackstone continues to grow, distributable earnings will continue to be driven by the more stable generation of fees, and the retention of realized investment income will help fund that growth. Therefore, investors should not worry about this change, as Blackstone's distribution will continue to grow, fueled by both the private equity business and its quickly growing real estate business. With the economy healing and the 3.2 % distribution yield safe, Blackstone should continue higher.

Disclosure: I am long BX.