Your Ship Comes In
When it comes to fighting inflation, income should play a prominent role in your portfolio. But you can’t just gravitate to the highest yields. You should be on guard against dividends that fail to keep up with the eroding effect of inflation.
When adding dividend-paying stocks to our portfolios, I look for companies that have shown consistent dividend boosts at least over the past three years that are backed up by both revenue and earnings growth. I also want companies that offer compelling values, trading below their forecasted earnings growth.
Textainer Group (NYSE: TGH) meets all of my basic criteria for growth, income and valuation. And it makes a highly effective inflation hedge.
Textainer manages a fleet of more than 3 million, 20-foot equivalent units (TEU) that are used in intermodal shipping, including standard containers and specialized units. The company has become the world’s largest leaser of intermodal containers. However, the company trades at a fairly persistent discount to its competitors.
Currently trading at just 10.8 times trailing twelve-month earnings, its price to earnings (P/E) ratio is only about half that of its industry peers. On a forward-looking basis it’s trading at just 9.3 times its forecast earnings, versus 11.7 times for its main competitor, TAL International Group (NYSE: TAL).
Despite its lower valuation, Textainer consistently outgrows its peers. Over the trailing three years, the company has averaged revenue of 26.8 percent while net income has averaged 31.6 percent growth. Earnings per share (EPS) have also averaged better than 28 percent growth over the trailing three years.
Much of that growth has to do with the company’s leasing strategy.
Given the fluid nature of global trade and the fact that the needs of shippers often change in terms of geography, it’s not uncommon for TEUs to be leased on a short-term basis. Textainer has been shifting its leasing approach, favoring long-term leases over short ones, and today more than 75 percent of its fleet is covered by long-term leases versus just 40 percent a decade ago. The company’s long-term lease coverage also tends to run at least 5 percent higher than most of its competitors.
That focus on long-term leases combined with effective fleet management has helped the company make a sharp improvement in its average utilization rate, taking it up from 83 percent in 2003 to about 95 percent today.
The company has also done a much better job of managing through weak economic times than many of its peers, remaining profitable for 27 consecutive years while maintaining and even growing its dividend for nearly a quarter century.
The company’s global diversification has a lot to do with that performance; it operates 14 hubs on five continents. That allows Textainer to easily weather any regional weakness, while increased trade activity comes in tandem with global economic growth and maintains the company’s high dividend.
Currently paying $0.47 twice a year and yielding just shy of 5 percent, Textainer holds its payout ratio around 40 percent of earnings. As a result, it is able to maintain sufficient operating capital while giving itself the flexibility to increase its dividend as earnings grow.
In the most recent quarter, the company’s revenue grew 8.4 percent year-over-year, reaching $132.6 million on 21 percent growth in lease income. EPS did decline, however, falling from $0.99 in the year-ago period to $0.71, due to increased loss reserves because of a questionable client in China in danger of default.
Such losses related to client defaults are relatively rare events and, when they do occur, recovery rates typically run in excess of 80 percent. In this case, though, the difficulty arises due to the remoteness of the client, making container recovery more expensive than simply taking the loss.
Over the long term, Textainer should be able to maintain steady earnings growth largely thanks to the improving global economy. As trade continues to grow around the world, demand for TEU will grow along with it, because this shipping method has become the standard in the shipping industry.
I’m adding Textainer Group to the Survive Portfolio as a buy up to 48.
When adding dividend-paying stocks to our portfolios, I look for companies that have shown consistent dividend boosts at least over the past three years that are backed up by both revenue and earnings growth. I also want companies that offer compelling values, trading below their forecasted earnings growth.
Textainer Group (NYSE: TGH) meets all of my basic criteria for growth, income and valuation. And it makes a highly effective inflation hedge.
Textainer manages a fleet of more than 3 million, 20-foot equivalent units (TEU) that are used in intermodal shipping, including standard containers and specialized units. The company has become the world’s largest leaser of intermodal containers. However, the company trades at a fairly persistent discount to its competitors.
Currently trading at just 10.8 times trailing twelve-month earnings, its price to earnings (P/E) ratio is only about half that of its industry peers. On a forward-looking basis it’s trading at just 9.3 times its forecast earnings, versus 11.7 times for its main competitor, TAL International Group (NYSE: TAL).
Despite its lower valuation, Textainer consistently outgrows its peers. Over the trailing three years, the company has averaged revenue of 26.8 percent while net income has averaged 31.6 percent growth. Earnings per share (EPS) have also averaged better than 28 percent growth over the trailing three years.
Much of that growth has to do with the company’s leasing strategy.
Given the fluid nature of global trade and the fact that the needs of shippers often change in terms of geography, it’s not uncommon for TEUs to be leased on a short-term basis. Textainer has been shifting its leasing approach, favoring long-term leases over short ones, and today more than 75 percent of its fleet is covered by long-term leases versus just 40 percent a decade ago. The company’s long-term lease coverage also tends to run at least 5 percent higher than most of its competitors.
That focus on long-term leases combined with effective fleet management has helped the company make a sharp improvement in its average utilization rate, taking it up from 83 percent in 2003 to about 95 percent today.
The company has also done a much better job of managing through weak economic times than many of its peers, remaining profitable for 27 consecutive years while maintaining and even growing its dividend for nearly a quarter century.
The company’s global diversification has a lot to do with that performance; it operates 14 hubs on five continents. That allows Textainer to easily weather any regional weakness, while increased trade activity comes in tandem with global economic growth and maintains the company’s high dividend.
Currently paying $0.47 twice a year and yielding just shy of 5 percent, Textainer holds its payout ratio around 40 percent of earnings. As a result, it is able to maintain sufficient operating capital while giving itself the flexibility to increase its dividend as earnings grow.
In the most recent quarter, the company’s revenue grew 8.4 percent year-over-year, reaching $132.6 million on 21 percent growth in lease income. EPS did decline, however, falling from $0.99 in the year-ago period to $0.71, due to increased loss reserves because of a questionable client in China in danger of default.
Such losses related to client defaults are relatively rare events and, when they do occur, recovery rates typically run in excess of 80 percent. In this case, though, the difficulty arises due to the remoteness of the client, making container recovery more expensive than simply taking the loss.
Over the long term, Textainer should be able to maintain steady earnings growth largely thanks to the improving global economy. As trade continues to grow around the world, demand for TEU will grow along with it, because this shipping method has become the standard in the shipping industry.
I’m adding Textainer Group to the Survive Portfolio as a buy up to 48.
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