Yield-conscious investors are likely finding it difficult to diversify outside of consumer staples and energy companies right now.
At the same time, many of these companies – particularly in the energy sector – have burned shareholders lately. Thus, I’ve been combing through different sectors to find one with attractive income opportunities.
Ultimately, I settled on transportation, as this sector offers numerous opportunities across the risk spectrum. Indeed, when it comes to planes, trains, and automobiles, there’s something for everyone here… and all of the companies in question are paying hefty dividends, too.
Now, as with any sector, transportation faces some unique challenges. Specifically, these companies suffer from being asset-heavy, since a substantial transportation network costs a ton of money.
Some companies, such as airlines, are even structurally unprofitable. It used to be said that the airline business had made an overall net loss since the Wright brothers – and while that may not be true after the last few relatively good years, the industry’s overall profitability still hasn’t paid for the capital costs involved.
Meanwhile, capital gains are rare for investors, other than in periods of high inflation. Instead, companies attract money by paying decent dividends. Therefore, as long as they’re not highly leveraged, many transportation companies are attractive investments for income-seekers – provided the risks are properly understood.
So, where should yield-hungry investors look?
For Lower-Risk Investors
One intriguing area of transportation dividends can be found in container ownership and leasing. On the whole, owning transportation assets is a better business than operating them, as owners can lease the assets and enjoy a steady payment. Plus, in the event of a costly downturn, the operators – rather than the owners – are forced to bear the massive employment costs.
Here are two companies worth considering:
The first is TAL International Group (TAL), which leases intermodal containers both domestically and internationally. It offers a quarterly dividend of $0.72, giving it a very nice 6.9% yield. TAL reported net income of $0.96 per share for the fourth quarter and $3.68 for 2014, which covers the dividend payment by a decent margin. In addition, it’s trading at just 10.9x forecast earnings, making it attractively priced (even though its share price is just over twice its book value).
Then there’s Bermuda-based Textainer Group Holdings Limited (TGH), which owns, manages, and trades containers. It also has the advantage of tax-free status on most of its earnings from international shipping container operations. The firm’s $0.47 quarterly dividend gives it a yield of 5.8%, with the earnings cushion covering the dividend at $3.32 per share. Plus, it’s trading at 10.3x next year’s earnings – though it has a slightly lower 55% premium to book value.
A Medium-Risk Opportunity
Those with a slightly larger appetite for risk should consider FLY Leasing Limited (FLY), which owns aircraft and leases them out to operators.
FLY is based in the tax haven of Shannon, Ireland. Through its favorable tax position and (in these markets) access to low-cost financing, the company has remained highly profitable. It grew its fleet by 22% in 2014, and is currently trading at 11.9x trailing earnings and 10.6x forecast 2015 earnings. In addition, it pays a $0.25 quarterly dividend, good for a yield of 6.7%.
All told, the aircraft leasing business is risky in downturns, and a credit crunch would be damaging to FLY – but the profitability and dividend yield at least balance the risks.
High Risk, High Reward
Finally, there’s shipping itself, where I’ve identified a high-risk, but high-reward, play.
When it comes to shipping, the attractive business today is in oil and gas tankers. You see, the decline in the price of oil makes drillers want to “store” excess supply in slow transit in oil tankers. Consequently, rates for these tankers have been strong recently. In contrast, dry bulk carriers – the other major shipping category – are currently suffering from the lowest bulk shipping rates in the history of the Baltic Dry Index.
Navios Maritime Midstream Partners (NAP) is a Monaco-based investor that owns and operates four very large crude carrier (VLCC) tankers, and has an option to acquire another seven such vessels. Although NAP went public only in November, it’s part of the large Navios group controlled by the Greek-American shipping heiress, Angeliki Frangou.
NAP declared a dividend of $0.19 for the 44-day period to December 31, 2014 and has declared an intention to pay dividends at a rate of $0.4125 per quarter, which would give the shares a yield of over 11% at today’s price. The shares are trading at 9.7x estimated 2016 earnings and at 55% of net asset value, meaning the high risk is compensated for by the valuation.
So there you have it: Transportation companies present a number of attractive dividend opportunities at various risk levels, from the relatively low-risk TGH and TAL, through the medium-risk FLY, to the high-risk, but potentially lucrative, NAP. Depending on your needs, each has the potential to be worth a position in your portfolio.