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New Flyer (OTC:NFYIF) is North America’s leading producer of heavy-duty transit buses, specializing in clean-energy vehicles (electric and natural gas-powered).

Since 2007, it has paid a steady dividend of CD $.0975 each month. Typically, the stock has traded around $11-12, for a yield of around 10%. During the panic of 2008, the stock crashed to the $5-$6 level, yet provided a fantastic yield for those who were willing to buy then. It was back up over $12 a couple of months ago.

But customers for transit buses can’t be found just anywhere. Urban transit agencies have been very badly hit by reduced government support; many are cannibalizing their capital investment funds (i.e. funds designated for buying new buses) just to meet operating expenses. So it should not have been much of a surprise when New Flyer reported a 10% decrease in new orders during the first quarter of 2011, along with a small net loss.

But the forward guidance was pessimistic as well, and included this warning: “The company’s Payout Ratio over the last two quarters has been above 100% - territory that is not acceptable. The company is proactively pursuing opportunities that are in the best interests of shareholders, customers, and employees.” (Entire pdf report viewable at here.)

Investors interpreted this as a threat to cut the dividend, and the stock price immediately dropped from 10.70 to 9.24. At that price, the dividend yield (if sustained) would be around 13%, depending on the U.S./CD exchange rate.

On Thursday, as I write, the price has suddenly dropped to around $8. What happened?

Whatever prompted the sudden sell-off, it’s not the threat of the dividend disappearing. Not only is it too early for the company’s board to be making a decision on that, but there’s another factor that guarantees a good return on this stock.

You see, it’s not really a stock at all. It’s a hybrid security, a share of stock bundled with a share of debt. Each monthly distribution includes CD$.06452 of interest payment. So even if the dividend is cut to zero, the yield at today’s price would be about 9.7%.

I suppose that a massive wave of transit-agency bankruptcies could threaten New Flyer’s ability to service its bond payments, but that’s a highly unlikely scenario. This is a great buying opportunity for income investors.

Disclosure: I am long NFYIF.PK.