(Written by Alexander Crawford.)
Wish you could go directly to the source for company information? One option is to look at regulatory filings with the SEC, such as the form 8-K, which companies use to report material events that could impact investors.
In most cases, companies have four business days to file a Form 8-K from the specified event, which can be triggered by accounting adjustments, new financial obligations, and changes in executive management, among other changes.
Here we wanted to focus on Item 2.03 Creation of a Direct Financial Obligation. A company uses this filing to report an issuance of new debt, a credit facility with a bank, or an obligation not held on their balance sheet (such as operating leases or the debts of unconsolidated subsidiaries).
When a company files a form 8-K 2.03, it should bring up several questions from investors: Is the company issuing more debt than you think is prudent? Are they issuing more debt now than they have in the past?
These questions are even more important for dividend stocks.
Shareholders (and their dividends) are always paid after debtholders because of the legal structure of debt arrangements. This means that rising levels of debt form a wedge between a firm’s value and a firm’s value to shareholders.
When a company issues more debt, their ability to pay dividends is usually weakened. This is why news of debt issuance is important to investors hoping to rely on their company’s dividend income.
To illustrate this idea, we ran a screen on the companies issuing form 8-K 2.03 over the last week for those paying dividend yields over 1% and payout ratios below 50%.
Do you think these companies are issuing too much debt? Bear in mind that debt itself is often necessary for companies to operate and expand, however the level of debt is a matter of debate among investors.
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1. Aircastle LTD (AYR): Engages in the acquisition, lease, and sale of high-utility commercial jet aircraft to passenger and cargo airlines worldwide. Market cap of $868.57M. Dividend yield at 4.99%, payout ratio at 31.84%. The company filed a form 8-K Item 2.03: Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant on 12-15. For a closer look click here.
Aircastle Limited issued $150 million in senior debt on December 14 for general corporate purposes, including the purchase of aviation assets.
2. IDEX Corporation (IEX): Engages in the manufacture and sale of an array of pumps, flow meters, other fluidics systems and components, and engineered products worldwide. Market cap of $2.97B. Dividend yield at 1.91%, payout ratio at 29.07%. The company filed a form 8-K Item 2.03: Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant on 12-14. For a closer look click here.
IDEX Corporation completed a public offering on December 13 for $350 million in principal amounts of 4.2% 10-year notes. The net proceeds will be used for general corporate purposes, which may include strategic acquisitions that complement the Company’s business model.
3. Franklin Electric Co. Inc. (FELE): Engages in the design, manufacture, and distribution of groundwater and fuel pumping systems. Market cap of $963.17M. Dividend yield at 1.30%, payout ratio at 20.67%. The company filed a form 8-K Item 2.03: Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant on 12-15. For a closer look click here.
Franklin Electric entered into a $150 million credit facility on December 14 with JPMorgan to replace an existing $120 million revolving credit facility, with the ability to request an increase to $225 million in commitments.