Seeking Alpha
Long only, value, special situations, preferred stocks
Profile| Send Message|
( followers)  

Summary

  • FLY offers a dividend yield of 6.9% at its current price.
  • High inside ownership and low P/E indicate possible capital gains.
  • Stock is selling at $3.50 below book value.
  • Cautions: high leverage and dependence on the airline industry.

Fly Leasing Limited (NYSE:FLY) is a global lessor of commercial jet aircraft. It has a fleet of 109 commercial aircraft leased under multi-year contracts to airlines throughout the world. FLY is managed and serviced by BBAM.LP, an aircraft leasing company with over 25 years of experience. BBAM is an independent company in which FLY has a 15% ownership interest.

(pictures take from FLY Annual Report 2012)(click to enlarge)

FLY leases specify that the lessee is responsible for full operational, maintenance and insurance costs of the aircraft. Most of the leases also specify fixed rental rates, maintenance accrual payments and security deposits as well detailed return conditions. The average age of the aircraft was 8.6 years on 12/13/2013 with 98% of the planes leased at an average lease term of 4.3 years. The fleet includes 109 narrow-body passenger aircraft where over half are Boeing 737 and 8 wide-body passenger aircraft.

(click to enlarge)

The company has just announced its 26th consecutive quarterly dividend since it went public in 2007. A $0.25 dividend was announced with a record date of 4/30/2014 to be paid on 5/20/2014. At FLY's current price of $14.61 (4/17/2014), the dividend nearly yields 7%. Other metrics show FLY selling below its book value of $18.13 per share with insiders owning 11.5% of the outstanding shares. FLY's trailing P/E is less than 10 and its forward P/E is predicted to be 9 at the current price.

With all these wonderful metrics, what is holding the stock price down? There are 2 issues: FLY's leverage and the volatility of the airline industry. Investors are wary of FLY's leverage since its debt was 3 times shareholders' equity at the end of the 2013. Furthermore, FLY management has stated that it intends to keep leverage at 3 to 4 times equity. This leaves the company very vulnerable to changes in interest rates. Any indication that interest rates are rising will send tremors to an issue with this amount of leverage. The other fly in the ointment is the vagaries of the airline industry. The history of the airline industry is strewn with bankruptcies and failures. Currently, airlines are profitable and most are doing reasonably well. However, history has shown that these profitable companies can turn to losers very quickly. FLY's leasing business is dependent upon this industry remaining profitable.

Conclusion:

FLY offers an excellent dividend return at its current price. At $3.50 below book value, the stock is selling at a price where one can expect to garner capital gains as well. With interest rates holding steady and the airline industry remaining profitable, this stock looks to offer excellent returns over the next 12 months. Since the company does not need to make any major loan repayments until 2018, the leverage is manageable over the near term. Take a look at this stock and see if it can juice up your returns over the next 12 months. (You can see what other SeekingAlpha authors have written earlier by clicking on the following numbers: 1, 2, 3)

Source: FLY Your Way To Dividends And Profits