Back in 2013, I gave Fly Leasing Limited (NYSE: FLY) a “C” rating for dividend safety. After several years of steady cash flow, the company invested in new equipment that took cash flow down below how much it paid in dividends.

I said that if the company returns to previous cash flow levels, there will be a low risk of a dividend cut. Let’s see if it has succeeded.

[ad#Google Adsense 336×280-IA]From 2010 to 2012, Fly Leasing Limited’s free cash flow came in between roughly $170 million and $180 million, while dividends paid were in the low $20 million range.

In late 2013, I was concerned that, because of higher spending on flight equipment, free cash flow would not cover the dividend.

I was right. Due to more than $600 million in aircraft purchases that year, free cash flow was negative.

In 2014, Fly Leasing Limited spent even more – $915 million – which created negative free cash flow of $615 million.

Meanwhile, because of an increased share count, dividends paid rose to $41 million. Note that the dividend per share did not increase, only the total amount of dividends that the company paid to shareholders.

Theoretically, the aircraft purchases will lead to higher earnings and cash flow. In fact, cash flow from operations did increase to $220 million in 2014 from $181 million the previous year. So the company was able to generate more cash from running its business. A good sign.

But that’s not what we’re examining here. We’re trying to determine if Fly Leasing Limited can continue to pay its $0.25 per quarter dividend. For that, we need to focus on free cash flow – cash flow from operations minus capital expenditures. That way, we can determine how much cash the company has on hand now.

In the first quarter, Fly Leasing Limited reported free cash flow of $39 million and dividends paid totaling a little over $10 million. The company still spent heavily on new aircraft, but was able to get most of that outflow back by selling older planes.

On the company’s conference call, management said it remains committed to growing the size and reducing the age of its fleet. That suggests to me that, in the near future, it will spend more on new airplanes than it will receive in sales of older ones.

The company’s dividend has been stable since 2009, but it did cut the dividend that year.

A management team that is willing to cut the dividend always concerns me.

Sometimes it’s for a very valid reason, but if it cuts it once, it won’t be afraid to cut it again.

And with the company bleeding cash from all of these new aircraft purchases, it wouldn’t shock me if management reduced the dividend.

Long term, management is doing what’s right for the business.

Short term, dividend investors could be in for a bumpy ride.

Dividend Safety Rating: C

Good investing,

Marc

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Source: Wealthy Retirement