On April 20, during the "Stock Watch" segment of my nationally syndicated "The George Jarkesy Show," Chief Analyst of the National Eagles and Angels Association Clay Mahaffey introduced Strayer Education (STRA), a company in the for-profit education business. We liked the company because of its high dividend yield, no debt, and great margins. The market today liked Strayer's quarterly report and the 12% increase in student enrollment it announced. The stock was up as much as 18% on Thursday and closed at $99.05. Here's what Mahaffey had to say.
George Jarkesy: I know it's Friday but put that cocktail down and pick your pencil back up! Get ready because we have Clay Mahaffey; it's not time to go to the weekend yet. We can still put a plan together here to make money for you the first thing Monday morning. Without further ado, here's Clay Mahaffey, who you can meet on Tuesday at the Eagles and Angel lunch. If you want to become a member of the National Eagles and Angels Association, it's cheap -- $199.00 a year.
So, tell us what you have for our listeners today.
Clay Mahaffey: This is another dividend paying stock, at a high yield. I like this stock for dividend yield and growth potential. The company is called Strayer Education. The dividend is $4.00 at yield about 4.6% and there is potential in that.
You may know this company, George. It's a for-profit educational company offering Associate, Bachelor's, and Master's programs in various fields. They have 92 campuses in 23 states plus an on-line course program. They have 54,000 students and 60% of them are 100% online.
As a business, it has a great business model. It is very profitable. The net margin is about 17%. It's not a capital intensive business, it doesn't build bricks-and-mortar schools, it just rents the space it needs for expansion. In addition, it sublets to local community colleges during the day. So it uses the building at night, makes more money subletting during the day, and gets programs with the community colleges, which are feeders for its degree programs.
The cash flow is about $150 million per year over the last three years. The dividend payout is only 32%, so there is room to increase that in the future. Last year Strayer purchased $200 million dollars worth of its own stock and has been purchasing stock back since 2003.
George Jarkesy: Every year since 2003, that's an important fact! The company has reduced its shares outstanding and bought stock back.
Clay Mahaffey: And paid off all of its debt.
George Jarkesy: Unbelievable. So let me get this straight: The company is debt free and has bought down its stock. What happens is that when it buys stock back the company retires it, which means there are fewer shares out there and each share is more valuable. This is exceptional. This is very good that this company for nine years has been reducing shares outstanding, making shareholders' stock more valuable every year. The only negative to that is if Strayer did it only when it was more expensive during the boom years, but it has done it before and after the boom years.
Clay Mahaffey: There are some risks here, George. 70% of Strayer's students receive U.S. government Title 4 loans. The company is in compliance, but there is a federal regulation -- if there is a certain default rate, it could lose some of that funding.
Strayer had better performance compared to its peers for these students paying back these loans. But you have to be aware that the stock peaked at $250.00 in 2010. And it has fallen down to $86.00, which even with the recession and reduced enrollment, the $4.00 dividend looks very secure. I think it will gain market share from Apollo and DeVry, its competitors that pay zero dividends or very low dividends. So, that's the outlook. Strayer has a conservative financial structure, a 4% dividend. I think this is near the bottom for the stock at $86.00; it will be steady and looks good for 4% to 5% growth.
George Jarkesy: Well, that's great. Strayer Education paying a 4.6% dividend. Thank you very much, Clay.
Clay Mahaffey: Thank you, George.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours..
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