HFF announced after the markets closed today that its board of directors declared a special cash dividend of $1.52 per common share, payable December 20, 2012, to shareholders of record on December 10, 2012, for a total payout of $56.3 million. Management previously hinted at a one-time dividend, so while we expect the stock to react positively when markets open Monday, we expect it to rise by less than the full amount of the declared dividend.
The company had $152.3 million in cash on balance sheet as of September 30, or $4.11 per share, so the dividend represents less than 40% of the company’s available cash, and the company’s balance sheet remains quite strong. The press release left open the possibility for further capital returns to shareholders. We believe another one-time dividend later in the current commercial real estate cycle is a strong possibility, as the company favors organic growth over acquisition, does not want to buy back stock due to limited float, and would not declare a recurring dividend due to the transactional nature of the business. We would not expect a one-time dividend to be an annual occurrence, however.
Stock Thoughts We continue to like HFF’s short- and long-term market opportunity on the heels of a strong third quarter in which the company nicely expanded its already-strong U.S. commercial real investment sales and debt market shares. The company continues to aggressively expand producer and office counts, an effort that we believe has held down margins in 2012, but should ultimately result in more scale and operating leverage; we expect the company to grow earnings at or above 20% looking out over the next several years, and we believe both the top- and bottom-line growth in the business is being underestimated by investors.
Any evidence of an acceleration in capital markets volumes in the United States or of more confidence in credit markets would, in our view, be a significant positive signal for the stock. We expect 2013’s growth will be better than 2012, but we do not expect the early days of 2013 to provide much in the way of evidence. Rather, we believe investors should be in front of the easy year-over-year comparisons heading into the second half of 2013. We view the company’s current valuation (5.2 times our 2013 EBITDA estimate of $77.3 million on Friday’s close of $14.83, or 5.9 times excluding dividend) as attractive and believe further clarity in macroeconomic and fiscal environments should support both earnings and multiple expansion in the coming years. We reiterate our Outperform rating.