“Bag a High-Flying 11% Yield” (Roger Conrad)

Today I’m looking for an interesting-sounding airline stock (yes, that does sound crazy — but bear with me). The tease came in from Roger Conrad a few minutes ago for his Big Yield Hunting newsletter, and he implies that although it’s maybe not as safe and solid as the picks he focuses on for his bigger Canadian Edge service, it does sound enticing. Here’s how he opens the teaser letter:

“We’re flying high this month.

“That’s because we’ve found a regional airline company with a yield that soars among the clouds. Up, up, up at 11%-PLUS yield.

“Right now, I bet you’re saying, “Roger, are you crazy!? An airline company? Haven’t you seen the price of oil lately?”

“I sure have. Airlines’ biggest expense is fuel. But oil prices that spike based on political events, like the turmoil in Libya, tend to be short-term.

“That makes it likely that jet-fuel prices will back off soon, which will send this airline stock price soaring.

“In fact, in addition to its healthy 11%-PLUS yield, I see potential capital gains of 25% to 30% in the months ahead.”

11% sounds pretty good, no? I don’t know whether or not current high oil prices will fall back down in the near future, or if the majority of airlines will just be forced to go through bankruptcy yet again — every flight I’ve been on recently has been very full, and that trend seems generally strong in most places after the huge cutbacks in capacity, but I suppose we’re all right to be wary — this has been one of the least profitably managed sectors in the US for decades.

But still, 11%. Not bad. Here’s some more info:

“As you may know, many former Canadian Income Trusts were forced to convert to tax-paying companies as of January 1, 2011. The big concern was, could they do it without cutting dividends?

“The good news for this Canadian regional airline is: It converted without cutting a single penny in dividends.

“Plus you need to know that it’s cash flow with these types of companies that measures profitability and dividend safety… not traditional earnings per share. And the payout ratio is a solid 82%.

“To boost cash flow even further, management is looking to cut a number of costs from fuel excise taxes to airline surcharges, and cutting interest expense by paying down the debt. Meanwhile, they’re focused on growth and expansion.

“They’re a smaller partner to a larger airliner, but every day, 790 flights in their dependable fleet take off from Canadian airports to 85 far-flung destinations in Canada and the U.S.”

So, what else? We learn that they have 128 airplanes, and are buying “up to 30” more. And we get another clue:

“They’ve signed on with a top-notch international travel and tour agency to whisk fleeing vacationers to warm and sunny islands, lush resorts on sandy Mexican beaches and exotic South American destination spots.”

So who is it? Well, we toss that all into the Thinkolator and learn that this is …

Chorus Aviation (CHR-B or -A in Toronto, CHRVF or CRHVF on the pink sheets)

And really, though the company isn’t well known under this name yet, taking the Thinkolator out for this one was probably overkill — there just ain’t that many regional airlines, and fewer still that pay a dividend.

Chorus Aviation’s primary asset is the Jazz airline, and the company used to be known as Jazz Air Income Fund — this is a regional airline that’s partnered primarily with Air Canada to supply off-peak service, flights to smaller locales, and point-to-point flights that bypass the major hubs, with service throughout Canada and also to some US and Caribbean destinations.

They do indeed have 128 aircraft with 15 more on order, along with options for another 15, and they do pay a consistent dividend that looks mighty appealing (and yes, they pay it in Canadian dollars — so it sounds even better on this site of the border right now). The dividend was cut in the Fall of 2009 down to five cents per share per month, and it has been steady at that point ever since, with projections that it will continue at this pace (though they now pay quarterly instead of monthly, so each dividend is 15 cents). The shares trade at about C$5.15 right now (that’s US$5.42), so the indicated yield is actually 11.6%.

And they do have a partnership with a big travel operator — they’re running charter flights to the Caribbean for Thomas Cook Canada, with Thomas Cook-branded airplanes, during the winter months. Given the strong Canadian dollar and the cold Canadian climate, I’d imagine that’s a good money maker — I expect there’s a good reason that my favorite resort in Mexico was always packed with Canadians (OK, and Minnesotans) in February and March.

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So the Thomas Cook deal is an interesting diversification, and apparently has started well in boosting revenues above what analysts had expected, and they’ve also started to diversify internationally, buying a non-controlling 25% stake in PLUNA, the flag airline of Uruguay (I think it’s safe to say that PLUNA’s finances have been troubled in recent years, but they appear to be rebuilding). Both of those caught my eye as making this potentially more interesting than “just a regional airline,” since regional airline stocks pretty much all look cheap right now, and probably for good reason.

The conversion has apparently gone pretty well for Jazz Air/Chorus, they say they’ll have the distributable cash to maintain the dividend at least through this year, which was better than some investor expected … but they are still beholden to Air Canada for the vast majority of their income, and though they have guarantees for a minimum level of fleet usage from Air Canada, those guarantees don’t necessarily reach a level that guarantees Chorus a profit, or any growth. There has been recent concern about the possibility that their Air Canada business will suffer in the coming years, partly because they didn’t get a contract that they seemed to expect, and partly because the new Air Canada union agreement might further tighten the use of regional and feeder airlines in the network. Here’s the last news I saw on that, from about two weeks ago.

The company won’t be presenting it’s first quarter results to shareholders until June 1, and though the change to a corporation was well-telegraphed this will be their first quarter since the conversion from a trust into a corporation, with the new name Chorus, so there may be something noteworthy in the call or the numbers. I like the aggressive attempt to diversify their business with Thomas Cook and PLUNA, and it’s true that the long-term operating partnership with Air Canada gives them a certain amount of stability compared to a stand-alone airline, but I does still give cause for concern that, like other regionals, they are subject, to some degree, to the whims of their big-name partners.

The company had a pretty clear investor presentation late last year as they were preparing for conversion, so reading that might give you a fairly good idea of how they see themselves in the future — they are, of course, optimistic.

If you decide to look into the shares, it might be worth comparing them to the larger US-based regional airlines — there has been consolidation in this group (and, like big airlines, a lot of the historic names have disappeared), but the publicly traded ones I’m aware of are SkyWest (SKYW), Republic Airways (RJET) and Pinnacle (PNCL). (Fellow publicly traded regional Mesa went into bankruptcy last year and recently exited, but the newly exited company is currently still private.) All of those have different operating deals with their partner airlines, but they also all operate several different brand names, with several different major airline partners.

And, as I said, if you look at earnings projections they’re all cheap — though they’re clearly hurting from fuel costs as a group and most of them, particularly the smaller ones like RJET and PNCL, are extremely leveraged (not unusual for airlines — planes are expensive). What stands out for Chorus as distinct from the others is that they’re very under-levered — part of a side-effect of being a trust is that they don’t carry a lot of debt at this point (financing was done through issuing new units, and the distributions can be thought of as their financing costs), though I expect that they’ll now ramp up some corporate debt as part of their fleet expansion.

I can’t say that I’ve been tempted to buy a US airline or a regional airline in a loooong time, but I will say that I’m intrigued by this Canadian firm — the Air Canada agreements going forward look like a risk, and they’ll obviously suffer some if oil prices rise further or even stay at this level, but they seem to have at least a decent chance of growing, using some of their new corporate flexibility to bring on more debt for reinvestment, and possibly turning their contracting work with Thomas Cook or their investment in Uruguay into something substantial — which ought to help them keep up the very high dividend. I’m not rushing out to buy shares, but I’m going to try to remember to keep an eye on these guys.

So … interested in Chorus? Have a better idea in the air or on the ground for generating some nice dividend income? Let us know with a comment below.



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Gravity Switch
Gravity Switch
May 3, 2011 1:46 pm

Thanks Harrison — I've added that one. Both classes are apparently traded with one having different voting rights, and they maintain the same price generally, but yes, one class is intended for Canadian citizens and one for non-Canadians. Don't know how or if they manage that for the pink sheets shares, since both classes appear to trade, at least occasionally, on the pinks.

👍 7
May 3, 2011 2:30 pm

I believe air canada is pllling plug on Jazz and starting anew something similar.

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Thomas Coleman
Thomas Coleman
May 3, 2011 2:41 pm

Harrison, what is the difference between CRHVF and CHRVF? Yahoo shows both of them as "Chorus Aviation Inc." But they trade at slightly different prices.

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May 3, 2011 7:07 pm

I have owned chorus for a few months now, and it doesn't seem to appreciate much but it does pay a good dividened.

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james moylan
May 4, 2011 11:39 am