With a new baby bond offering coming it is past time to check out Ladenburg Thalmann (AMEX:LTS) to see how the company is doing.
As some have reminded me I had originally bought the LTS-A preferred stock issue a few years ago–probably in 2013 or 2014. I sold it at some point though and no longer own the issue. With the benefit of hindsight I wish I had held it all through the years as it has been a steady monthly payer.
I decided to pull up the 2017 financials and see why I thought it was dicey holding in the past–it took me only minutes to see why I thought that was the case. Many times in the past couple of years the company has not covered their dividend payments–but that is improving.
For 2017 LTS had a GAAP net income of about $7.7 million BEFORE payment of $32 million in preferred stock dividends. The primary source of liquidity for the company over the years has been the issuance of common and preferred stock (instead of net income).
Now when we look at cash flow it paints a somewhat more positive picture as free cash generated during 2017 was about $36-37 million ($7.7 million of net income and adding back $28.8 in depreciation).
Now the company has been growing nicely with revenues now over $1 billion for the 2017 and net income in the quarter ending 12/31/2017 was strong compared to earlier quarters with $6.6 million in net income and free cash of $13 million. So in the final quarter of 2017 they nicely covered the preferred stock dividend of $8.4 million. They also had a 1 off of a credit of $6.7 million for taxes because of tax law changes.
During the quarter ending 3/31/2018 revenues again grew nicely and they had net income of $7.7 which when added to depreciation (a non cash charge) of $5.8 million means they covered the preferred dividend of $8.5 million with free cash of $13.5 million.
So the company is on the right track with growing revenues, but they are continuously selling some high yield 8% preferred stock which puts a whole lot of pressure on cash needs—$34 million/annually is needed right now just to service the preferred stock dividend.
The history is this for the preferred stock—outstanding shares–
12/31/2014 11.1 million
12/31/2015 14.7 million
12/31/2016 15.8 million
12/31/2017 17 million
This data is from the 2017 10K which can be found here.
At the end of 2017 the company still had 6.8 million shares of LTS-A available in a ‘at the market’ offering so we would have to assume that they are continuing to sell shares into the market when they can do so.
The common shares trade for $3.74/share which is up substantially in the last year or so as the company has improved their financials. Shares traded as low as $1.70 in 2016.
Now forget the information above. Phillip Frost MD own 35% of the company. Ladenburg has a revolving credit agreement with Dr. Frost which pays him (a company he controls) 11% interest. This agreement continues until 2021. This data is in the most recent proxy materials found here.
Additionally Frost owns real estate etc. that Ladenburg leases and there are other various incestuous relationships in the company.
Is this information bad?? Common share holders may not think much of the arrangements, but preferred holders should feel some level of comfort having a billionaire watching over the company. The odds that Dr Frost would let the investment go very far south is remote. Here is Dr Frosts bio–the biggest downside is he is 82 years old.
So in summary I think that the word ‘dicey’ is appropriate for describing Ladenburg. I think that holding the preferred shares is ok as the reward is fairly high for the risk involved. With Dr Frost holding a nice sized purse there is some comfort that he would backstop the company.
We would suggest that holders make sure to watch the quarter earnings releases to make sure the dividend is being covered and to make sure they don’t back slide.