While searching for a good dividend pick with fast growth, I stumbled upon this small company with a fast dividend growth, a high yield, a low payout ratio, great fundamentals and a great business model. This fulfills all my criteria for a company to be added into my dividend portfolio, as shown here. With this, I researched further, and found one hidden gem.
This company is Textainer (TGH), the biggest owner of marine cargo, or intermodal containers.
Business Introduction & Background
Founded in 1979 and headquartered in Bermuda, Textainer owns, manages and leases of a fleet of marine cargo containers worldwide, also known as intermodals. Intermodals are metal boxes which one would normally see in the shipyard, stacked on top of one another. To get a better understanding, here is a picture:
This is a Textainer intermodal. Looks familiar?
Now, for more about its business model. Besides owning a large fleet of 1.6 million containers, Textainer also leases dry freight containers, as well as special-purpose containers (refrigerated containers, etc. ) to more than 1,000 customers worldwide, which include more than 400 shipping lines, some freight forwarding companies, and even the United States military. The company also manages some containers on behalf of the owners. All these are done through the company's over 150 offices and depots. Besides this, the company also sells up to 100,000 containers yearly.
I like the company's business model as it is a needed service. Even in recessions, goods and parcels still have to be transported from one place to another, through Textainer's containers. This is true, especially with the internet becoming such a large platform for people to buy and sell goods- through websites like Amazon.com (AMZN) or eBay.com (EBAY), providing Textainer the necessary growth to thrive.
Although the company's business model is quite boring (lessor of intermodals), it is these companies that provide mundane and boring businesses that perform best. For example, Altria Group (MO), a cigarette company, was actually the company that provided the highest returns over the past 50 years.
With this in mind, here is a snapshot of the company's key numbers to understand a bit more about the company's fundamentals.
|Income (2011||$201.30M (Trailing P/E: 8.39)|
|Sales (2011)||$476.19M (Trailing P/S: 3.91)|
|Book Value per Share (BVPS)||$17.39 (P/B: 1.92)|
|Return On Equity (ROE)||24.94%|
|Long Term Debt/Equity Ratio||1.84|
|EPS Growth Past 5 Years||21.07%|
|Dividend Growth Rate (Past 5 Years)||12.9%|
Through this brief snapshot, Textainer looks like a fundamentally healthy company. I will elaborate on these numbers later in the article.
1. Strong Past Growth & Favorable Future Prospects
Textainer's IPO was in late 2007, therefore, not all the company's EPS numbers are available. Currently, the past 9 years' of EPS numbers are available, as shown here. Even so, I will keep you updated if I find information for Textainer's 2002 EPS numbers. Textainer has delivered very impressive earnings over the past 9 years, having grown by 16.93% annually over the past 10 years and 18.02% over the past 5 years. This is remarkable earnings performance for any company, although some of this growth could be attributed to the small size of the company, which have been maintained within the mid-cap range ($300M-$2B) since the company's IPO.
As shown above, Textainer has grown earnings at a considerably fast rate over the past 9 years, and this growth is poised to continue to grow based on a few points.
Needed Service, High Demand By Customers
Textainer, which provides intermodal containers to other groups or companies, mainly shipping fleets, provides a needed service. Parcels and goods still need to be transported from one place to another even in recessions, and with the internet now as a platform for many to buy and sell goods, Textainer does not look like it is going out of business anytime soon. Furthermore, with a whooping 95% of all goods transported around the world by ship, all these containers that Textainer lease are going to continue to be heavily utilized.
Shipping companies also rely heavily on these containers. Leasing, instead of buying containers benefits them a lot. Firstly, they do not have to spend so much on these boxes. This is a crucial point, especially with the entire shipping industry facing headwinds at the moment. Especially in these hard times, if they buy and manage their own containers, it would only make the company more cash-strapped, and leave them with less funds to perform their internal operations, like upgrading their fleet, or performing other operations that needs a considerable amount of funding.
Secondly, the shipping companies can respond to unexpected demand much better. When there is a sudden surge in demand for these boxes (more orders), they will just have to lease more containers from companies like Textainer. On the other hand, if they choose not to lease containers, the shipping companies would have to order the containers, which would take time, and would also have to spend a considerable amount of money on them. Additionally, this surge in demand is prone to last only for a short period of time, and the additional containers would have to be left unused in the inventory. This will cost the company a considerable amount of money. Miscellaneous costs like inventory costs and a lower resale price (when selling the used containers) will hurt these shipping companies over the long term. Thirdly, leasing enhances operational flexibility. This point is somewhat connected to the second point. As Textainer has more than 150 offices and depots globally, leasing containers from Textainer can ensure that they meet customer demands better, as these containers will be available in one of Textainer's many depots. As shown here, Textainer has offices all over the world, from Asia to Europe to even Africa.
Largest Owner Of Intermodals; Industry Leader
Textainer is also the industry leader, with a market cap of $1.86B and 2011 earnings of $201.3M. Behind Textainer is TAL International (TAL), with a market cap of $1.25B and 2011 earnings of $129.24M. Two smaller competitors are CAI International (CAP) with a cap of $485.27M and 2011 earnings at $58.95M and SeaCube Containers (BOX) with a cap of $388.76M and 2011 earnings of $46.27M.
Being the industry leader, Textainer has many advantages over its smaller peers. Firstly, it can charge a premium price solely because it is the leader, and has more offices and depots across the world. When customers need containers in places which are less developed, they are likely to lease containers from Textainer, with the largest network of offices all over the globe. Therefore, customers will gladly be charged at a small premium. Secondly, it can buy more containers at a lower price. It will most likely purchase containers in bulk- much more than its competitors, and is likely to get a discount from the supplier. Therefore, this increases its profit margin and benefits the company as well as the shareholders.
Rapid CAPEX increase- Signifies High Demand
Textainer's Capital Expenditure (CAPEX) numbers have also been increasing rapidly over the past few years. This number has increased from $88.8M in 2009 to $344M in 2010 to $760M in 2011. As Textainer uses capital mainly to purchase more containers, this signifies a surge in demand for these containers. This surge in demand is verified after one looks at the earnings numbers (stated above), with EPS numbers increasing from $1.88 in 2009 to $2.43 in 2010 and to $3.80 in 2011.
CAPEX numbers have also been surging on a quarterly basis, increasing from $224M in Q3 2011 to $423M in Q3 2012 (latest quarter).
High Fleet Utilization
Even as the company is buying new containers at a rapid pace, one key benchmark of assessing demand for the containers- Fleet Utilization, have been kept at a high number since 2003. The table below shows Textainer's fleet utilization number since 2003.
|Year||Fleet Utilization (%)|
The number has consistently been kept above 90% for most of the years, with the exception of 2003 and 2009, when there were recessions. Additionally, the company has recovered extremely well since the 2009 recession, with the fleet utilization number having been kept above the 95% mark, which is an extremely high utilization number for a company with a large number of containers like Textainer. Furthermore, this number has also increased despite a large scale purchase of containers.
Furthermore, the fact that 77% of Textainer's containers are in involved in long-term leases show the good relationship between Textainer's and its customers, which ensures Textainer's profitability in the years to come.
2. High & Fast Growing Dividends
Textainer pays a high and consistently growing dividend. The company has a $1.76 dividend at the moment, which equates to a 5.26% yield based on the stock's closing price on 04.01.2013. It is expected to pay its next dividend in early March. This dividend yield is much higher than most stocks in the Dow Jones and the S&P 500, whose dividends average around 2% at the moment. This dividend has also been consistently growing every single year since the company's IPO in 2007. This dividend has grown rapidly, from just $0.20 per year in 2007 to a considerably higher $1.63 in 2011. This shows that the company is committed to returning value to its shareholders through dividends. The table below shows Textainer's dividend payments since its 2007 IPO.
Textainer's dividends have also been increased for a streak of 11 straight quarters (since Q1 2010) and has been increased on a yearly basis since its 2007 IPO.
3. Attractive Valuation
Textainer looks like a good buy according to its valuation. Trading at a meager 8.4X trailing 12-month earnings, at 1.9X book value and 12.9X free cash flow, it makes good sense to pick up some shares in the company. In addition, the stock is also cheaply valued as compared to its past valuations, with an average P/E of 9.14 since its IPO, as shown in the table below. (Also note that the lowest P/E value the company had was 3.6 in 2009, when prices got extremely depressed very briefly during the recession.)
|Dec 31st, 2007||8.65|
|June 30th, 2008||10.73|
|Dec 31st, 2008||5.96|
|June 30th, 2009||6.14|
|Dec 31st, 2009||8.95|
|June 30th, 2010||13.34|
|Dec 31st, 2010||11.82|
|June 30th, 2011||9.35|
|Dec 31st, 2011||7.66|
|June 30th, 2012||9.41|
|Jan 4th, 2013||8.39|
In addition, the company's valuations, at 8.39X earnings and 1.92X book value per share, also look quite attractive as compared to some of its other competitors. For example, TAL International has a P/E of 9.66 and a P/B of 2.08, considerably higher than Textainer's valuations. The other two (smaller) companies have valuations in line with Textainer's valuations.
Basic Calculations Using Historical P/E Ratio And EPS
Textainer has a 2013 EPS estimate of $3.99 and an estimated EPS growth rate of 7.7% over the next five years. Assuming that Textainer grows at 7.70% over the next 5 years, Textainer will have an EPS number of $5.37 in 2017, after five years.
Assuming that the stock's price reverts to a P/E of 9.14 (average) in 2017, the company's stock will be worth $49.08 per share, which equates to a 8% growth in capital over the next five years (if one buys today), which is an good return. In addition, when one adds all the consistently growing dividends shareholders will receive over the next 5 years, the percentage of capital growth quickly increases into the neighborhood of 12-14%, which makes the return a lot more impressive.
4. Strong Fundamentals
Note: Information on the fundamental numbers date back only to its IPO, no information for periods before its 2007 IPO.
Firstly, its ROE has been maintained above the 15% mark since the company's IPO, and has locked in an impressive 24.94% as of the latest quarter. A high ROE indicates that a company's management is using shareholders' investments more effectively, which is highly beneficial to both the company and its shareholders. The definition of ROE is the amount of net income returned as a percentage of shareholders' investments. The table below shows Textainer's ROE numbers since its 2007 IPO.
Secondly, its Book Value per Share number had been increasing annually since its IPO, from merely $8.49 then to $17.39 now. This is a remarkable 15.4% growth in BVPS per annum since the company's IPO. The BVPS value is calculated by subtracting all liabilities from all assets, then dividing it by the total number of outstanding shares. The table below shows Textainer's BVPS values over the past 10 years.
|Year||BVPS (Book Value Per Share, $)|
Lastly, Textainer's profit margins have been increasing over the past 10 years, which is fabulous, as it shows that the company is able to gain more income out of every dollar in sales. The company's profit margin is now at an impressive 41.88%, which is within the top 3% of the entire universe of stocks and the highest as compared to its other competitors. This outsized profit margin could also be attributed to the fact that it has a good amount of pricing power, being the largest in its industry. The table below shows Textainer's profit margins over the past 10 years.
|Year||Profit Margins (%)|
Key Risks & Flaws
1. Low Current Ratio
Firstly, the company's current ratio is at a low 0.85, which could be potentially dangerous for the company. The formula for the current ratio is current assets divided by current liabilities. A current ratio below 1, like Textainer has, means that the company has more current liabilities than assets, and therefore the company could have difficulties paying off short-term obligations. Although Textainer's current ratio is not far below 1, I still view this as a flaw.
|Current Assets||Current Liabilities|
|Current Ratio: 0.85 (here is the link to the company's balance sheet)|
2. High Amount Of Debt
Secondly, Textainer's debt/equity ratio is at a high 1.97, which equates to about 1.78B in debt. This is an extremely high number to me, as I normally would like a company's debt to be much lower than its equity (my limit for Debt/Equity is <0.5). This ratio shows the proportion of equity and debt the company is using to finance its assets, and the higher the ratio, the more debt, rather than equity is financing the company. A high level of debt compared to equity can result in volatile earnings and large interest expenses.
Although this is the case, I think that Textainer's debt consists mostly of what is called "Good debt", which is money borrowed to expand the company further, with the company's CAPEX numbers increasing quite rapidly, as mentioned previously. "Bad debt", on the other hand, is debt that is used to maintain the company and fund internal operations that should be funded by earnings.
3. High Beta- Very Volatile
Lastly, the company is extremely volatile, with a beta of 1.67. This means that the company is 67% more volatile than the market, theoretically. This extreme volatility has also been proven through the previous 2008-2009 recession, when the company dropped more than the S&P500- totaling to 70% (from the $17 range to the $5 range). Although the company has performed extremely well since the recession, one must have the guts to tolerate the drop and the correct mindset to not give up the position.
In conclusion, Textainer's stock is a great stock to buy over the long term, as proven from its many qualities and favorable prospects as mentioned above. Additionally, its many qualities, especially those which involve its high and fast-growing dividend and its favorable business model, make it an ideal pick for any dividend portfolio. Although it also has quite a few flaws, no company is perfect, and I believe its many qualities make up for these flaws.
With this in mind, I have decided to make Textainer my top pick for 2013 and also add it to my dividend portfolio at the same time- now with 28 stocks, with the previous additions of ConocoPhilips (COP) and Novartis AG (NVS).
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TGH over the next 72 hours.