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Long only, value, long-term horizon
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Summary

  • High dividends make this an attractive hold for DRIP investors.
  • Low P/E puts TAXI in the value category.
  • Uber is getting too much credit as a threat.

For the equity investor dividends are the true key to wealth generation. There will always be news of the rare investor that timed a purchase and sale "just right" but those stories will always be eclipsed by the real gains made by those that had their dividends reinvested automatically. I like to call it the least sexy way ever to get rich.

Medallion Financial (NASDAQ:TAXI) first caught my eye because of the high dividend payment, currently 24 cents quarterly. The yield as of today (price of $11.62 ) is a juicy 8.3%. A look at the dividend history reveals that the dividend has increased regularly since March of 2010 and the distribution is up by 60% since then. The payout ratio is high at 85%. The Chairman and President, both named Murstein and I assume to be father and son, together hold almost 2 million shares and collect nearly $2mm annually in dividends on top of their salary, a clear incentive to keep the dividend dollars flowing to shareholders.

My recommendation is to go long and have your dividends reinvested quarterly as they are paid out. Many brokerage houses will do this for you without a transaction fee. There is a double upside here. First, if the price of the stock continues to fall, you will benefit by gaining more shares faster as you dollar cost average your purchases when the dividends are reinvested. On the other hand there is a good chance the stock price will recover, yielding an opportunity to score a capital gain. Limit your down side by not selling in the short term if the price continues its slide.

At a price of $11.62 the P/E ratio of TAXI is just 10.29 which is just about half the S&P 500 average of 19.42. Of course with a market cap of just under $300mm there are some risks here that may not be present in the larger companies that make up the S&P. The important point is that a low P/E ratio combined with the high dividend payout will gain attention with value investors.

So if this is such a great stock, why has the price been going down instead of up? The primary blame can be placed squarely on the shoulders of privately held Uber who has been making news with their $18B valuation based on their most recent round of financing. TAXI makes most of their revenue by financing taxi medallions. Medallions act as barriers to entry to the taxi markets in major metropolitan areas such as New York and Chicago and are used in revenue generation for the city as well as regulation. Historically these medallions have increased in value faster than equities and have made for reliable security for higher than market average rate loans. The market thinks that the days of traditional taxis are numbered which will cause the value of medallions to fall and the number of medallions needed decrease. Reports of the death of the taxi have been largely exaggerated.

Taxi regulations ensure revenue to the municipality and a safe consistent product to the user. City officials will are unlikely to allow the revenues from taxis to just slip away. As Uber becomes ubiquitous the use will be taxed in the same vein as states have made Amazon collect sales tax. While Uber has a rating system for both drivers and passengers word of dissatisfaction or a dangerous situation will be used as reason to initiate regulations on the program, reducing drivers, adding costs, and leveling the playing field. Uber drivers may suffer additional blows. Expect new regulations to require additional inspections, insurance, and likely some type of registration.

Ultimately I expect that the taxi industry will take this as a wakeup call and will end up as a partner with Uber to make a system that is faster, cheaper, and smart phone friendly.

I expect Medallion Financial too will take this as a wakeup call and expand the portion of their portfolio that does specialty lending on recreational vehicles and boats. In the mean time, this is a great long term buy and hold.

Disclosure: The author is long TAXI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Medallion Financial: Take A Ride To Higher Dividends And Growing Wealth