REITs have outperformed in the broader market selloff, in my opinion due to cheaper valuation going in and steady fundamentals. There is still, however, some selling within REITs as the broader market selloff has increased the market’s reaction function. Little news items that would normally go by without impact are magnified by the general volatility that has ticked up.
Uniti shares were sent tumbling this week by a Morgan Stanley analyst who downgraded UNIT on Windstream uncertainty. The powerful impact of this report seems odd given that Windstream uncertainty is a topic that has been discussed ad nauseum for well over a year. Additionally, the consensus has shifted to it being likely that WIN will prevail in the court ruling with it mostly being a question of when we will finally get a result.
The Morgan Stanley report also speculated that a dividend cut is possible as the low stock price challenges access to equity capital.
A company can cut its dividend at any time and without the ability to read the minds of management and the board I cannot know what they are going to do. Fundamental analysis simply affords a look at whether or not UNIT will be forced to cut the dividend and we see the dividend as fundamentally sustainable.
UNIT is cashflow positive and does not have major debt coming due for years. If we assume Windstream wins the court ruling, UNIT’s revenues are durable and growing organically. Its cashflows and margins should naturally increase over time which can lower the mid 90% AFFO payout ratio without a cut.
Given the current fundamental outlook I think it rather clear that UNIT does not NEED to cut the dividend. However, there is some chance that they elect to cut the dividend.
Uniti’s potential choices
UNIT has a massive growth pipeline in success-based-fiber outlays, sale-leasebacks, and towers. This pipeline substantially exceeds UNIT’s available capital, with a dividend cut being one of a few potential ways to finance growth. Thus, UNIT has a few choices here:
- Sit tight and let the current assets cashflow and grow organically (dividend remains)
- Pursue only the most accretive acquisitions and fund them with debt (dividend remains)
- Pursue a large portion of available growth opportunities and fund it with a mix of debt, equity and retained capital (dividend cut)
None of these is inherently bad. A dividend cut is merely a capital allocation decision that is not always indicative of struggle. Uniti can choose to be either a slow growth company with a huge dividend yield or a fast-growing company with a medium sized yield. In either case, shares are priced below the expected long-run fundamental value.