I initiated coverage on Fly Leasing (NYSE:FLY) on December 24, 2014 with a view that the high dividend payout will continue for the stock. Since initiating the coverage, Fly Leasing has trended higher by 13.8% and the company's dividend has also been sustained. With a focus on the finer details in 1Q 2015 results, this article discusses the reasons to remain bullish on Fly Leasing. I believe that the company's current dividend payout will be sustained through 2015 and the stock is also likely to trend higher in the coming quarters.
For the first quarter of 2015, Fly Leasing announced a dividend payout of $0.25 per share which translates into an annualized dividend payout of $1 per share. At $14.8 per share, Fly Leasing provides a healthy dividend yield of 6.7%. In my view, the dividend payout will be sustained and the dividend yield is likely to decline as the stock trends higher in the coming quarters.
Instead of focusing on the headline revenue, EPS or growth numbers for the first quarter of 2015, I will focus on the factors that will translate into stock upside in the coming quarters.
The first factor to be bullish about is the company's successful fleet revamp strategy that's continuing into 2015. In 1Q 2015, Fly Leasing sold three aircraft for a gain of $2 million and the company has already entered into contracts to sell eight aircraft that have an average age of 17 years. From an average age of 13.7 years in FY12, the company's aircraft average age has declined to 12.6 years in FY14 and with older aircraft being disposed of in FY15, the average aircraft age will decline further.
I rate this strategy as "positive" because modern aircraft are more fuel efficient and clients would be willing to contract these aircraft for a longer lease term than older aircraft. The impact of the fleet revamp is evident in the company's remaining lease term (that also provides revenue visibility). The lease term has increased from 3.2 years in FY12 to 5.3 years in FY14.
The second reason to be bullish on Fly Leasing is the company's financial flexibility that will help achieve the $750 million aircraft acquisition plan for FY15. As of 1Q 2015, the company had $2.2 billion in secured debt with a net aircraft book value of $3.7 billion. Therefore, the loan-to-value in terms of secured debt is just 59% and this provides significant financial flexibility for growth in the coming quarters.
Even if the total debt of $2.9 billion is considered, the loan-to-value comes to 78%, which implies sufficient leveraging scope backed by aircraft value. I must add that Fly Leasing reported an EBITDA of $112 million for 1Q 2015 and this translates into an annual EBITDA of $450 million. Considering the annualized cash interest payment of $96 million, the company's EBITDA interest coverage is 4.7 and this implies a strong credit position.
From a cost perspective, Fly Leasing has certain positives that are worth mentioning. First, the company has reduced the SG&A expense as a percentage of total revenue from 10.6% in 1Q 2014 to 7.7% in 1Q 2015. Second, the company has reduced the cost of secured debt from 5.12% in FY11 to 4.03% in FY15. In 1Q 2015, Fly Leasing re-priced a $446 million term loan and this helped reduce the margin by 75 basis points ($4 million in annual interest saving). Therefore, the company has been making the right moves from a cost reduction perspective.
From a shareholder value creation perspective, Fly Leasing has also announced a $30 million share buyback program, and I believe that this underscores the point that management views the stock valuation as attractive at current levels. With an unrestricted cash position of $280 million and a potential annual operating cash flow of $240 million (1Q 2015 annualized), Fly Leasing is well positioned to continue paying dividends, make further share repurchases and also continue revamping the aircraft fleet.
In conclusion, Fly Leasing remains an attractive stock to consider and I believe that the company will continue to reward shareholders through capital appreciation and robust dividends. The company's sound financials and continued efforts to reduce general and interest costs will translate into further shareholder value creation.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.