Thank you guys for the feedback! Let me respond, not to argue but to discuss, since you were kind enough to inquire and comment.
First, this is a very risky investment, as is obvious from the high yield. The market is clearly pricing in a dividend cut and probably credit or balance sheet issues as well. And as we have seen with KMI, the market tends to get such things right most of the time. I would never encourage anyone to invest in STB!
Here are some responses and additional thoughts:
This company is in a multi year decline, it is trading at 62 times cash flow, 71 times earnings. The return on assets is less than 1% and yet at today’s price the dividend is greater than 12%.
This is not a Saul stock in any way.
Thanks Flygal! A couple of thoughts in response (not in argument, just discussion):
First, the last point is 100% correct, obviously. I hope no one thought that I was suggesting that STB is a Saul stock! It is at best a company that will pay its dividend and bounce back to a price that makes that dividend a reasonable percentage yield – maybe a double. That is not the likely scenario; it is the best case scenario. Saul would gag and choke if he accidentally found this company in his portfolio.
I think maybe FCF and P/E are not necessarily optimal metrics for this company, which grows vigorously through acquisitions (of companies and property and equipment) – at least, FCF and P/E do not tell the whole story. E.g., for a different perspective, looking at 2015 annual figures, the dividend was $34 MM and the CFFO was $56 MM, so if the dividend yield is about 12%, the CFFO yield is about 20%, implying a valuation at 5 x CFFO. Just another data point.
The balance sheet seems pretty healthy to these uneducated eyes:
This is an excellent assertion for you to prove to us, and by proving it you can sleep well at night. The general rule of thumb is that if it seems too good to be true, then it is. Why would so many investors shun a 12.5% dividend?
A combination of correctly perceived risk and reaction to aggressive shirt attacks, I think. See discussion below.
Why are you so much more certain than all the experts who would love to own a “safe” dividend like this.
I hope I am being as clear as possible that “certain” does not enter into this, or in fact any of my investing activities. For my thinking, see discussion below, although why anyone would want to see my thinking about investing escapes me. Now if you want to talk about physics or law, that is a different story . . . .
What % of cash flow goes to pay it?
34/56, or about 60% of CFFO. The rest of CFFO is spent on equipment and a bit on acquisitions, directly and in the form of interest payments on acquisition debt. FCF comes nowhere near covering the dividend.
What % of earnings goes to pay it? This “recession proof” company is also very slow growth, where is the money coming from?
For 2015, dividends were $34 MM and EBITDA was $70 MM. Taxable income was about zero due to depreciation and interest expense. This is standard for STB; it is STB’s business model (which has been followed with success for many years now, including through the Great Recession). Like STON, which uses a similar model, it seems to many to be a juggling act, and quite possibly they are right.
Basically, on average over time, CFFO is sufficient to cover investments in property (and of course interest expense, which is included in the calculation of CFFO), but not dividends and acquisitions. So if the company were to stop growing, the investment in property expenses would be reduced (but would still be significant) and the acquisition expenses eliminated, meaning that there should still be room for a dividend, but a reduced one. IOW, much of the dividend depends on continued growth of the business, which depends in large part on continued access to the credit markets. (All of this is just my best effort; I am not even competent at this stuff.)
The question is whether the market is over-pricing the undeniable risk here. If the company can continue to do what it has done since 2007, including through the Great Recession, this probably should be a $5.50 stock paying a 7% dividend or so, and at that price offering little prospect for growth. OTOH, that is not necessarily a bad deal in a very low return future, as predicted by a lot of people (Bill Gross, Jeremy Grantham, Jack Bogle, etc.).
How risky is this stock at current depressed prices? Very risky. But even Saul stocks are not necessarily safe these days – look at SKX, SWKS, BOFI, etc. – and we have not even had a real correction yet! So you have to, as you know, weigh the risk against the return. This is not so easy in tough environments.
Looks like divi got cut in July. Given that rates are actually looking like they are increasing, I’d expect more pressure on this company and on the divi.
Why would people take the extra risk of holding this? A 12% divi is no good if the underlying shares keep decreasing in value.
I don’t mean to come off as sarcastic, I legitimately don’t see the draw of a 12% yield when the underlying is in such a strong downtrend, but would welcome some reasons to change my thinking
Hi Mike, thanks for the comments.
The dividend was not cut last summer; the company began paying it in $US:
the Company’s Board of Directors approved a change in the currency of its monthly paid dividend at its recent Board meeting. Effective July 1, 2015, the beginning of the Company’s 2016 fiscal year, all dividends will be paid in U.S. dollars.
“With almost 90% of our revenues and cash flows in U.S. dollars (USD), a significant portion of our remaining debt in USD, and the fact that we have been reporting in USD for the past ten years, we have decided that it is in the best interests of our shareholders to monetize our forward foreign currency contracts and use our USD cash flow for our distributions,” stated Denis J. Gallagher, Chairman and CEO of Student Transportation Inc. "We remain a Canadian corporation and will continue to trade in Canadian dollars on the Toronto Stock Exchange, as well as maintain our listing on the NASDAQ which trades in USD. . . .
“The two currencies have been extremely volatile over the past few years,” added Gallagher. “Beginning the month of July 2015 and payable on August 17, 2015, we will be paying USD 0.0366 per share per month to shareholders of record. The amount was calculated on a volume weighted average price over the 30 day period prior to the Company’s most recent quarter end. As we have done for the past 123 consecutive months we will continue to pay the dividend monthly once approved by the Board of Directors on a quarterly basis. We believe this continues to be a very attractive investment and yield for shareholders. The new business and operational changes we have in place for our new fiscal year beginning this July will increase revenues, lower costs and put us in a better position to lower our payout ratio. Our goal over the next three fiscal years is to increase our operating cash flow per share by 5-7% annually.”
Looking at a five-year chart on the Toronto exchange, one can see that almost the entire price decline (in Canadian dollars, which eliminates currency effects) occurred in 2015.
What changed in 2015? Well, the world became more aware of credit risk, and that is important here for a highly leveraged company that grows by debt-funded acquisitions. This is risky! But also there was a real crescendo of short attacks on Seeing Alpha, all tied to the sustainability of the dividend, basically.
The dividend is easily covered by operating cash flow; the surplus operating cash flow is used, along with a lot of debt and some equity issuances, to fund acquisitions and investments in property. The amount of debt issued each year is roughly equal to the amount of debt repaid each year.
The Company is now buying back shares, which does not seem consistent with the “cash-strapped” story being told by the shorts, and has paid a never-reduced monthly dividend for 131 consecutive months. The CEO is very confident that the Company is financially strong:
Student Transportation Inc. (STI) (TSX:STB) (NASDAQ:STB), . . .announced today that for the period of December 4, 2015 to December 8, 2015, it purchased 116,106 of its common shares pursuant to the normal course issuer bid (NCIB) program. . . .In addition, STI officers and directors have bought additional common shares in the market over the last few months reflecting their confidence in the company. [NOTE – these purchases do not show up with respect to the US-traded stock, probably because they were made on the Toronto exchnage.]
Denis J. Gallagher, Chairman and CEO of STI, stated, “Unfortunately our current share price today isn’t reflective of the strength and financial performance of the company. With significantly lower fuel prices this year, a portion of our fuel already locked in for next fiscal year at even lower prices, plus lower operating costs as we integrate more of our technology into our fleet; our business and operating performance has been at its best and highest levels in our history. We are headed into our strongest three quarters of the fiscal year with a tailwind from our new business model. Our core business is solid and our new non-asset business unit is building and running well, and we expect additional news to report on those businesses shortly. Our recent share purchases in the market reflect, what we believe to be, an undervalued share price relative to our business prospects, our intrinsic valuation, and to where we have traded over our eleven year history as a public company. With 90 percent of our revenues in US dollars, oil at a recent low of $37 barrel, interest and financing rates at all-time lows, combined with the strength of the U.S. dollar, our business is stronger today than it has ever been and is well-positioned for the future. Next week we will be paying our 131st consecutive monthly dividend. Our dividends have been a hallmark of our performance. They are approved quarterly in advance by the Board of Directors and we have not considered any change to that policy.”
Gallagher added, “Kids are still going to school. We are the best in the business at what we do and we have a tremendous reputation in the industry for safety, service and innovation. The stability of the business and long term visibility of our contracted revenues have always been key attributes of our success. I’ve never been more confident in our short term and long term financial and operating performance and our mission to build a great company.”
Every article in recent times on STB is negative. Most are short attack articles, but the following article seems balanced and sober to me (and it too is negative, just without the usual histrionics):
Thanks again for the comments. I am not really trying to acquire control of this company! But I will possibly buy more on dips if the CFFO remains strong and access to the credit markets is not threatened. Or I may listen to you guys and save myself some money!