When it comes to financial services,Â BGC PartnersÂ (Nasdaq: BGCP) does a little bit of everything â€“ trade execution, market data, commercial loan origination and much more.
It pays a strong 6.5% yield based on its most recent quarterlyÂ dividendÂ declaration ofÂ $0.18Â per share.
BGC Partners has a policy of paying out at least 75% of its earnings in the form of dividends. Through the first nine months of the year, the company earned $0.64 per share while paying outÂ $0.54.
However, I always look at free cash flow, not earnings, to determine a companyâ€™s ability to pay its dividend. Thatâ€™s because earnings have all kinds of noncash items in their calculation. And dividends are paid with cash, not accounts receivable and depreciation.
BGCâ€™s free cash flow has been all over the place. Last year, it generated more thanÂ $1 billionÂ in free cash flow after a 2016 where it bled gobs of cash. This year, free cash flow is expected to be lower than in 2017.
SafetyNet ProÂ issues a penalty for declining free cash flow, which will be the case this year â€“ even when free cash flow still covers the dividend, which it easily will. BGC Partners will likely payÂ $211Â million in dividends this year.
However, BGC has an unusual situation â€“ one that will likely result in a dividend cut.
BGC Partners is spinning off its real estate businessÂ Newmark GroupÂ (Nasdaq: NMRK), which had an IPO in December. The spin-off is expected to be complete by the end of the year.
As of the end of the third quarter, BGC Partnersâ€™ post-spin-off business would have generated a dividend of $0.14 per share.
Newmark also pays a dividend ofÂ $0.09. BGCâ€™s shareholders will receive shares of Newmark once the spin-off occurs, though the exact amount has not yet been determined. So shareholders who elect to keep shares of Newmark will receive dividends on both stocks.
The company expects earnings to grow at leastÂ 29.5%Â next year. Remember, even though I base the dividend safety grade on free cash flow, BGCâ€™s management uses earnings to determine the amount of the dividend.