You might remember that we took a look at a railcar maker teased by John Mauldin’s Yield Shark newsletter about a week and a half ago — it was pitched as a way to benefit from government largesse and pocket a nice dividend, and several Gumshoe readers seemed interested.
That stock is also up almost 10% in the ten days since we wrote about it, it got some positive mention from Jim Cramer and redeemed some debt, in addition to getting whatever small push was made by the Yield Shark recommendation that came out a few days after we wrote about the teaser … so that seemed like it was good enough to make us want to go back and see what other stocks they’re recommending in their January issue.
So ARII was the first of the ideas they teased, the 3.1% yielder with the big backlog and record earnings, but they say they’re suggesting four top picks this month. Here are the clues about the others:
“The second is trading in the mid-teens and throws off a handsome 6.2% dividend. It’s a diversified hedge fund-like investment that’s managing over $66 billion invested in more than 70 different companies. Names like Del Monte Foods, Dollar General, First Data, HCA hospitals, Sealy mattresses, and Toys R Us.”
This one, according to the Mighty Mighty Thinkolator, is Kohlberg Kravis Roberts & Co. (KKR), the now publicly traded face of the famous private equity/leveraged buyout firm. This is a publicly traded limited partnership, like large competitors Blackstone (BX) or Carlyle Group (CG), and their goal is to pay out in distributions to partners (that would be you) substantially all of their asset management business earnings and, one presumes, keep the capital gains on their investments to reinvest or build the business.
It’s been going well of late for KKR and most of the other big private equity firms that are publicly traded — but the dividend is not guaranteed at any particular level. Annualizing the most recent payout of 24 cents would get you a yield of close to 6%, but the actual trailing four quarters of dividends are lower than that (more like 5%).
I don’t know a lot about what KKR’s doing with their current portfolio, but they seem to still be a more “traditional” private equity and buyout firm, making their money by taking companies over, making them more efficient, wringing cash out of ’em, and eventually floating them back on the public markets at higher prices. That differentiates them from Blackstone (BX), which has been getting a lot more attention over the past year because of their overwhelming focus on real estate, including their huge fund that’s buying up single family houses. You’re buying management and their deal-making ability, in this case, and at the moment you’re paying a decent premium to the reported book value (more than 2X book, though I don’t know how they report the book value of their portfolio companies) but getting a lot of cash flow generation and earnings, and a good dividend, at a pretty low earnings multiple (the stock trades for a PE of about 8 right now, though analysts do not expect much growth this year).
That’s the basics on KKR — how about the others?
They didn’t share many clues in the most recent ad that I got today, so I had to pull out the earlier ad from January 18 that hinted at all four of the same companies — here are the clues from that:
“Fiscal Cliff Winner #3: Another Investment Bank with 2.6% Yield
“Another giant investment bank is going to enjoy the benefits of two fiscal cliff corporate giveaways – so-called active financing and the Liberty Zone tax break.
“Between the two tax breaks and company’s growing record profits and earnings, we believe this is another ‘must-own’ 2013 stock.
“It’s one of the largest investment banks in the US by assets and operates its business in 6 segments.
“Retail Financial Services: traditional retail banking which includes real estate mortgages. The company is the #2 mortgage originator and #3 mortgage servicer in the US
“Card Services and Auto: credit cards and auto loans
“Treasury and Securities Services: investment management for assets of $16.9 trillion. Yes, trillion
“Commercial Banking: lending services to businesses
“Asset Management: investment management to retail customers
“Almost across the board, all of the company’s divisions are enjoying rising revenues and growing profits.
“In spite of that impressive profit growth, get this – the company’s share price is trading for only 9 times earnings and at a 10% discount to book value!
“Based on the current price, this investment banker’s share price pays a 2.6% dividend yield on a low payout ratio of 23%. That leaves plenty of room for both a dividend increase as well as growth.
“It’s also in the the process of an ambitious multibillion stock buyback program that we figure should goose earnings per share by 20% when it is completed by the end of 2015.”
This one is JP Morgan Chase (JPM). It’s cheap, it’s a massive, massive bank, and I don’t understand massive banks at all. You can research that one to your heart’s content, you can be sure they’ll always be in the headlines and there will be new stuff to read every day.
JPM does trade at a discount to reported book value, while Wells Fargo (WFC) trades at a premium to book, but Wells Fargo doesn’t have the gigantic investment banking business like JPM and is more of a “traditional” bank … and I have never taken the time to try to really understand bank balance sheets. JPM and WFC trade back and forth as to which is the larger bank, they have comparable dividend yields and market cap size, they are #1 and #2 in the mortgage market, and after that my eyes glaze over. Beyond that, you’re on your own — feel free to share your thoughts on JPM and the big banks with a comment below if you like.
“Fiscal Cliff Winner #4: A Unique Company with a 5% Dividend Yield
“Remember all the finger-pointing at private jets and the millionaires who buy them?
“The ‘Bonus Depreciation’ allowance was extended through the end of 2013, allowing businesses that purchase new equipment to deduct a greater percentage of the purchase price.
“Under previous tax laws, only 20% of the cost of the equipment was able to be written off in the first year. Under the fiscal-cliff agreement, businesses will be able to write off a whopping 60% of the purchase price.
“That’s great news for all kinds of businesses, even yours and ours. But it’s especially good for businesses that invest in and purchase very capital intensive goodies – like private airplanes.
“Our favorite is an owner and lessor of cargo and commercial aircraft. At the end of the second quarter, this company had 155 planes under long-term lease.
“Its business model is simple and wildly successful: it makes money by leasing out the planes at a higher yield than what it borrows money at to buy the planes. It’s able to borrow at an average cost of 5% but leases the planes out at the equivalent of a 14% return, earning the 9% difference.
“That is an extremely profitable spread, which will be even higher with the tax savings from the bonus depreciation. There’s more…
“In the first half of 2012, the company earned $0.68 a share, but that included a $10 million impairment write-off. Without that one-time charge, earnings would have been closer to $0.80 and would annualize out to $1.60 a share
“It recently refinanced the bulk of its debt and anticipates the savings to add an additional $0.50 to profits in 2013.
“It is adding $200 million worth of new aircraft to its fleet which should boost earnings going forward.
“The company’s share price is selling at a whopping 43% discount to book value!
“All told, we believe the company could earn as much as $2.00 per share in 2013, an impressive amount of profit for roughly a $13 stock. Currently fetching less than seven times earnings, that makes the company’s share price a true bargain. And with a 5% yield, to boot!
“Growing earnings, selling for 35% less than book value, a 5% dividend and a fiscal-cliff tax winner, what’s not to like?”
This one is Aircastle (AYR), which is indeed a pure play aircraft leasing company — and they do leverage the current low interest rates quite nicely, churning out a 5% yield thanks to quite a lot of debt. There are other big aircraft leasing companies, including GE (GE) and AerCap (AER), but they’re all either divisions of other companies or they do different things in addition to leasing the equipment (AerCap looks like a better value on some metrics, but is even more levered and doesn’t pay a dividend — they also provide maintenance and other services beyond leasing). The headline-grabber in aircraft leasing has been AIG for a few years with their International Lease Finance division that owns something like 1,000 airplanes, but it sounds like they’re in the process of trying to sell that off to Chinese investors.
I assume that they really are getting a benefit from some of these writedown provisions, but aircraft leasing is also a bit like a trading game — you have to continually buy new planes because those get better lease rates and terms, and you generate a lot of cash flow beyond earnings because those planes depreciate quickly, so you want to capture the depreciation and then sell the plane while it’s worth substantially more than the depreciated value. There’s been a real premium on new planes over the last five years or so because of their much better fuel efficiency, since fuel is a major cost problem for airlines, but we’ve also had some big fluctuations in demand for airlines with the swings in the economy, particularly in the US, so I would assume that for AYR to be a great long-term investment you need a continued pretty steady increase in global demand for air travel. Seems logical to me, though I’m sure I can’t predict such things very well.
So there you have it — the other three of the “Fiscal Cliff” plays from Yield Shark. Any of them sound good to you? Better or worse than the tank car manufacturers (or other railroad stocks, for that matter)? Let us know with a comment below.
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