Fly Carefully With Babcock & Brown Air

The company's IPO prospectus shows "pro forma" earnings of $11.7 million, or 35 cents a share, for the first half of 2007.

Double that number and you get $23.4 million of net income for 2007, and 70 cents of EPS. Assuming the quarterly dividend of 50 cents in 2008 holds, then the annual dividend would be $2 next year.

Babcock & Brown has not given any future earnings guidance. Unless the company is able to triple its earnings per share from this year, it likely will be paying out far more than it is earning in 2008.

That's not unusual for aircraft-leasing firms. The companies instead argue that their cash earnings (which add back noncash charges such as depreciation to net income) cover their dividends.

Babcock & Brown spokesman Matt Dallas reiterated this policy to TheStreet.com: "We expect to pay out dividends from our distributable cash flow, which is the revenue generated from our aircraft portfolio, less all related cash expenses."

Nonetheless, that poses issues for investors.

Based on its 33.6 million-share count, Babcock & Brown would pay $67.2 million in dividends next year, based on the $2 dividend.

According to Babcock & Brown's prospectus, the company's first-half 2007 "pro forma" operating cash flow was $44.6 million. That would have covered the dividend payment, which, based on the above calculations, would have been $33.6 million for a half year.

That results in the company paying out 75% of its cash earnings in the form of dividends.