When income investing, I primarily look for boring businesses that offer high dividend yields with a long history and low volatility in share price. Energy stocks like Kinder Morgan Energy Partners (KMP) or Enbridge Energy Partners (EEP) certainly have their place, but I routinely seek out other stocks "off the beaten path" to add in some industry diversification.
Student Transportation Inc. (STB) , a provider of school bus transportation services, is a recent stock that I came across that fit this bill. The company offers an attractive 8.5% dividend yield that has been consistently paid over the past 100 months, while its management team has built a solid market position in a boring (predictable) business.
Student Transportation Inc. is North America's third largest provider of school bus transportation services. With more than 9,500 vehicles, the company has built a dominant niche that's diversified across both the U.S. and Canada, providing drivers, dispatchers, maintenance, technicians, terminal managers, and others.
During its fiscal third quarter of 2013, the company reported revenues of $120.5 million and adjusted EBITDA of $25.9 million. The company reported lower top- and bottom-line results due to a prolonged and rough winter, but its 12-month contracts ensure that these deferred revenues will ultimately be included in its full-year results.
- Dividends. The company recently paid its 100th consecutive monthly dividend with an annual dividend yield of 8.58%, according to Morningstar. With a price to cash flow ratio of 13.3x, there is ample free cash flow to support this dividend long-term.
- Valuation. The company's price-to-book ratio remains at 2.5x, which is lower than the industry's 6.9x average, according to Morningstar. While some of its other ratios remain above-market, this might be justified given its above-average dividend yield.
- Performance. The company anticipates a 15% increase in annualized revenues in FY2013 versus FY2012, while its existing contracts tend to be very secure with a 95% renewal rate in FY2012, setting the stage for very stable and long-term growth.
- Other. The company has implemented initiatives to reduce costs, secure new contracts, reduced fuel cost risks via customer-paid fuel provisions or mitigation clauses in 60% of its contracts, and even expand their use of environmentally friendly vehicles equipped with liquid propane auto gas fuel systems ("LPG") next year.
Risks to Consider
- Debt. The company had outstanding debt balances totaling $224 million, as of March 31, 2013, including $108 million in convertible debentures, $35 million of senior secured notes, $80.8 million in credit agreement debt, and $100,000 in salary and other debt.
- Acquisitions. The company made seven acquisitions during FY2012, which added a lot of debt, although management indicated that it would pause its acquisitions during FY2013 to focus on integrating those that were already made.