ADT's Special Dividend Looks Like a Steal

It's been fair to say -- up until recently -- that shares of home security company ADT have been nothing short of a disappointment, since the company once again went public in early 2018. For dividend-income seeking investors, this share -price collapse has popped the current yield on the quarterly dividend of 3.5 cents per share to roughly 2.2%, modestly ahead of that for the S&P 500. But things are about to get interesting.... ADT is primarily recognized as a home-monitoring company, and those services account for 85%-90% of its quarterly revenue. Some may argue that business has subscription-like qualities: Roughly 80% of its overall revenue is recurring in nature, per management's comments in its June quarter earnings press release. Regardless of how you categorize it, the business is a predictable generator of revenue and cash flow. ADT announced earlier this month a deal to sell its ADT Security Services Canada business to Telus Corporation for about $526 million in cash. From a revenue perspective, ADT's Canadian business accounted for about 5% of revenue stream and given its more capital-intensive nature, the divestiture should allow more of the remaining 95% of the business, which is U.S.-focused, to drop to the bottom line. Now one might think ADT would use the cash proceeds to chip away at the debt on its balance sheet. That debt stood at $9.8 billion exiting the June quarter and led to $155 million in interest expenses during that quarter alone. Breaking that down, roughly $330 million was current debt with the balance in long-term debt. Over the last several quarters, the quarterly interest expense has outweighed ADT's operating profit generation, leading to reported bottom-line losses. But instead the company announced its board authorized a one-time special dividend of up to $550 million and plans to set the dividend at 70 cents per share. Combined with the regular quarterly dividend, that equates to 84 cents per share in dividends over the coming year and a current dividend yield of more than 13%. That's quite a catch, but as we've seen before, once that special dividend comes and goes, investors will once again turn their gaze to the core business, which is running a gross revenue attrition rate of 13.3% over the 12 months ending in June 2019. And while the company looks to spiff ups its balance sheet, it is still mired in long-term debt, a parting gift from when it was acquired by Apollo Group for $6.9 billion and merged with Protection 1. To be fair, when it once again became a public company, it had more than $10 billion in total debt on its books. So what's the bottom line? We have a company with a high degree of recurring revenue, but its financial operating performance is being impeded by the quarterly debt servicing associated with the debt on its balance sheet. And while the current dividend yield associated with the regular quarterly dividend payment is nice, it's the special dividend that is enticing. The final details of that special dividend will be shared when ADT closes the divestiture later this quarter. My gut tells me we have a short-term dividend payment trade opportunity, meaning investors that want to chase a high dividend yield prospect should go long ADT shares, wait for the special dividend payment and then revisit whether or not they want to own the shares. If the company still has the same debt load, odds are the luster will fade as the special dividend checks are cashed.

ADT's Special Dividend Looks Like a Steal

But despite the recently authorized a one-time dividend of 70 cents per share, the company's debt should still sound alarm bells.

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