Many of the readers out there in the great Gumshoe Universe love Roger Conrad — or at least, they love his steadfast attachment to high-dividend stocks that comes through in pretty much all of his newsletters whether they focus on sexier/riskier high yields (Big Yield Hunting), boring “essential services” stuff (Utility Forecaster), Canadian or Australian stocks (Canadian Edge and Australian Edge) or partnerships (MLP Profits).

And we confess to having a soft spot for “checks in the mailbox,” too, so I’m always happy to sniff out a new dividend-focused teaser from Conrad — which brings us to today’s pitch for Canadian Edge, which over the past six months or so has teased everything from Crescent Point Energy to A&W Root Beer.

This time around he’s pitching … school buses.

No, not the companies who make those rattly yellow cauldrons filled with adolescent angst … but the poor misbegotten souls who drive the things.

OK, that’s not quite right — he’s teasing a company that acts as an outsourcing contractor to run school bus transportation systems for school districts. Yes, just like many organizations might outsource their landscaping or their janitorial services to a private company, some school districts outsource their busing.

Here’s how Conrad entices in today’s tease, with a few clues tossed in for good measure:

“My latest secret recommendation is doing nothing less than revolutionizing the student transportation industry and the services it provides to tens of millions of customers… on at least a twice-daily basis.

“Major, unstoppable trends are accelerating in this business, and this company’s management is taking full advantage….

“I love finding a new prime investment opportunity, especially one overlooked or (even better) underestimated by financial media pundits….

“Perhaps this terrific opportunity is so unique it’s simply off Wall Street’s scope. Whatever the reason, I believe it’s a classic case of a hidden gem in the Wall Street swamp. But always remember…

“Great investing bargains are born of this.

“That’s why I urge you to consider this farsighted company I believe is ready for a significant run-up—growth-wise and income-wise—in an environment tailor-made for their strategy, namely…

“Reinventing an historic American icon in the 21st century

“The business plan is impeccable. The timing is ideal. Business is thriving—second-quarter revenue rose 24.4%, spurring a 19.5% increase in cash flow, as the company expanded its reach with acquisitions and hefty new contracts.

“Adding to the attraction (and my mystification at others’ lack of enthusiasm), this stock offers a generous 8.0% MONTHLY yield as I write, and few of us investors even know of its existence.

“For the cherry on top, my new recommendation is trading below my target prices, and some of my sources say this outfit is a ripe and ready takeover target. (My team and I are still investigating the rumors, but a takeover would not be surprising at some point.)”

So that’s the basic idea — a school bus company, with a thriving business and a good yield, booking new contracts and making acquisitions to fuel further growth.

But what does he mean by that “environment tailor-made for their strategy” bit? Mostly that school districts are broke and school bus fleets are old and expensive to maintain, which should spur more outsourcing — here’s how he puts it:

“… about 70% of all school buses are owned and operated by public school districts and are part of the bureaucracy with all the ensuing problems that entails.

“Ah, but therein lies the opportunity

“That’s because the times—and the old yellow school bus—are a-changing.

“Across America, many government-operated school bus fleets are in pitiful condition.

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“What’s more, thousands of these districts are cash-strapped and eager to opt out of the business some believe they have no business being in— i.e., running a massive, complex bus system—as they stare into a bleak future of skyrocketing fuels and maintenance costs.”

And though this is a Canadian Edge pick, it sounds like the company is looking at the US for their growth:

“They already provide schools with transport in 10 northern U.S. states, as well as California. This includes serving the Los Angeles Unified School District, the second largest in the U.S.

“Currently, they are focusing on new business in the southeastern U.S., where 90% of school bus systems are district- or state-owned—many of them financially squeezed. Outsourcing is a key way for these entities to save money.

“Two southern states, South Carolina and Florida, are working on bills that will mandate that school districts offer operation of their bus fleets to the best private bid.

“Similar measures are in the works in Alabama, Georgia, North Carolina and Virginia.”

So … enough sifting through the clues, yes? OK, we confess — they had us at “school buses” and we didn’t necessarily need all those clues, though it’s lovely to have them for 100% confirmation. There’s really only one income-focused pure-play on school bus transportation available in the stock market, and that’s who Conrad is teasing: this is Student Transportation of America (STB in both NY and Toronto)

We’ve mentioned Student Transportation a few times over the years, though not since they got their US listing last Fall — they used to be a (also yield-focused) hybrid investment called an Enhanced Income Security, which was a short-lived type of investment that folks used to try to create high-yielding investments that were similar to the then-popular Canadian Royalty Trusts. (The EIS was basically a portion of a high-yield bond stapled to a share of common stock).

STB has since de-listed that EIS and paid down some of the debt, and now are really a fairly standard company, albeit one that’s still carries a lot of debt and pays a big dividend. They have to borrow a lot of money to buy buses to win new contracts, then depreciate a lot of that expense over the years, so they don’t generally show particularly great earnings — but they do generate a steady cash flow, and they focus on distributing that cash flow to investors through the dividend.

You can tell that investors like STB quite a bit more these days than they did when it was a stapled EIS franken-stock, or at least they’re more confident in the company, because it carries a yield of just 7% now compared to around 12% a couple years ago. And they are still renewing contracts well, with reportedly a renewal rate in excess of 90% and quite a few new contract announcements in recent months, so things are at least decent at STB.

Which doesn’t necessarily mean the shares are likely to skyrocket — but interest rates are low so their debt isn’t hurting them too much, and they’ve been able to win some decent-sized contracts lately, so they may well keep chugging along in spite of the fact that you’d probably consider them to be pretty expensive if you ignored the dividend (revenues did climb 24.4% in that last quarter, for example, as Conrad teased, but profits actually dropped by better than 50%, and they’ve done several equity offerings to raise money to pay down debt, acquire companies, and invest in new contracts — this one is tough to justify on earnings or book value, you have to buy it for their cash flow ability, their yield, and the management’s ability to grow the size of the pot that spits out that yield).

There are a few large competitors in the school bus outsourcing space, but not any that you can buy for a nice, direct “pure play” like STB is, should you believe that we’re starting a wave of massive profits for school bus operators as more districts outsource and they enjoy higher demand and efficiencies of scale — the other big company I know, Laidlaw, was bought by a UK firm (FirstGroup), and the second-biggest US firm, Durham School Services, is also now owned by a UK transport firm … so there are multinationals out there who see money in the sector, if you want a template for the kinds of companies that do buyouts in this space. I assume that most of the other bus operators are either regional private companies or other subsidiaries of big multinationals (Veolia, for example, runs a lot of school bus transport systems in Australia … though I don’t think they do the same in the US right now).

I think STB is the third biggest US student transportation contractor now (they’re probably about 75% US/25% Canada now in terms of revenues), so they’re certainly big enough to get some decent deals with busmakers and impress school boards, and get some efficiency in their operations as they’re able to combine regional operations, particularly for maintenance, fueling, especially for newer projects like alternative fuel fleets, and logistics management (it doesn’t cut down much on the number of buses or drivers they need, of course, but every little bit helps).

Does that sound like the kind of stock you like? Pretty heavy debt, good 8%+ dividend, possible tailwind for growth as states and school boards seek to save money … that’s the basic idea, let us know if it interests you or if those high-backed green vinyl seats just give you the heebie-jeebies.

And, of course, if you’ve tried a subscription to Canadian Edge we want to hear about it — it’s currently got a pretty high ranking thanks to positive reviews from our readers, but many of those ratings are getting a bit long in the tooth … so if you’ve subscribed, please click here to let us know what you think with a quick review.