Bridgepoint Education (BPI) is a for-profit education company. At the end of 9/30/11, they provided education services to 90,597 students. The firm was launched in January 2004 by the CEO, Andrew Clark, and Warburg Pincus. From small roots, the firm has grown incredibly and in the 9 months ended 9/30/11, Brigepoint had revenues of $712.1mm and operating income of $238.4mm.
The incredible profitability of the firm is similar to the rest of the for-profit education industry. This has brought scorn from lawmakers who control the funds (student loans) that ultimately drive Bridgepoint’s revenues. Fear and uncertainty over potential regulations have put a lid on the shares. As I noted in a recent article, “Why Shorts And The Street Have It Wrong About Bridgepoint,” I noted that the current valuation of Bridgepoint is crazily low. “The PE for consensus 2011 earnings sits at 6.9X. Moreover, the company, as of 9/30/2011, sat on $344.7 million of cash and marketable securities. Backing out cash of $6.10 per share, the PE on 2011 earnings is 4.9X. With the market trading at near 13X, clearly Bridgepoint doesn't get credit for having an outstanding business.” In my opinion, the fear about possible legislation has been more than priced in by the market.
So, why might the stock have a 5% yield in the near future? Cash is building up on the balance sheet at an astounding rate. Given management’s guidance for Q4, net income should be over $20mm for the quarter and $170mm for the year. As noted above, their cash balance was most recently $344.7mm. Given that they have stated that enrollment in 2012 will be higher than 2011, their revenues and profits should at least exceed this year’s amount. (Since there is so little capital in the business, Free-Cash-Flow is typically above Net Income) So, simple math says that if they don’t increase their buyback which was recently concluded, they will have nearly $535mm in cash on the balance sheet as of 12/31/12. (344.7+170+20) That would be $10.43 in cash per share for a company with a $20.70 stock. Alternatively, the $535mm in estimated cash compares to a current diluted market cap of $1,159mm.
In a recent presentation at the William Blair – Global Services Growth Stock Conference on December 7, 2011, management stated that, (emphasis mine) “We do look at all aspects of returning those dollars to shareholders. We've made $135 million in stock repurchase in the last 14 months. We've exhausted the current authorization. We're discussing what's the value of continuing that, there's other options for us, there's dividend options and I think we continue to look at it. I mean, the market's obviously, the market's for return on that money is pitiful. So there is actually risk to leaving it in the banks. So there is some opportunities for return, we do have a situation where our float is constrained. And our goal is to attract long-term shareholders, who would buy a sizable positions and you have that certain amount of float in order to attract that group. So, but the flipside of it is we do generate, we'll continue to generate cash and we need to put it to work for the shareholders.” (A webcast of this conference call can be heard here)
So, my interpretation of what management was saying just 8 days ago, was that cash is piling up on the balance sheet and they have to do something about it. Returns they can achieve by putting it in a bank account are meaningless so they need to return it to shareholders. Their float (shares held by the broader public, and not insiders) is reaching a point that limits their ability to buy back stock. So, dividends are the best and most likely option.
How much might the dividend be? Remember, net income will likely be above $170mm next year. Instituting a 30% payout for 2012 would give $51mm to provide to the 51.317mm shares outstanding. That’s a $1 per share dividend. Quick math says that’s a 4.8% dividend yield with a stock price of $20.70. (Admittedly, without large capital needs to expand the business, they could do even more. Funding a $2 per share dividend (9.7% yield) at $105mm, or a payout ratio of 62% would not be a stretch for them to do.)
Given the dearth of companies with a 5% or so yield outside of the oil and gas, and basic materials and resources sectors, that should be a catalyst for the shares. (As a sidenote, I ran a Bloomberg screen for US companies that had > 15% 5-year compounded revenue growth, > 4.8% yield, > $1 Billion market cap, and not in the utilities, oil and gas or basic materials sector. There were precisely 3 companies that met the criteria: AT&T, Century Link and Frontier Communications. Bridgepoint, with a 4.8% yield, would probably see a nice spike in their stock price given the scarcity of high income generating alternatives. And unlike its telecommunications peers, as I noted in a recent article, Bridgepoint is likely to see significant growth in 2012.
But wait, there’s more! I noted that the company would only have a 30% payout to achieve a 5% dividend yield, with the stock at $20.70. Thus, the net income for 2012 not paid to shareholders in a dividend, plus net income for Q4 2011, plus cash on the balance sheet currently would still add up to $483.7mm at the end of 2012 (344.7+170*70%+20). That equates to $9.43 per share of cash on the balance sheet even with the $1 dividend. Therefore, I foresee management giving a $3 special dividend during 2012 to push the cash level back to the $330mm level (roughly where it is now) at the end of 2012.
In sum, if management proceeds with this path, current shareholders will get nearly 25% of their current investment returned in cash in 2012. Also remember that the company is controlled by Warburg Pincus, a highly regarded private equity firm. Given the time value of money, and Warburg's need to deliver high returns to their clients, Warburg will likely push for a significant dividend as well. (They were likely pushing the large stock buybacks BPI has historically done). While great for longs, those short the stock (short interest is 66% of float) would have a very hard time continuing to short the shares with such a high yield. All of these factors lead me to believe that there is a dividend in Bridgepoint’s near future, and the path of least resistance for the stock, is up.