Globalization is an unstoppable force. Here’s how income investors can get in on the action.
The world’s largest shipping company, Denmark-based A.P. Moller-Maersk (OTC: AMKBY), recently reported its net income tripled to $2.3 billion in the second-quarter of 2014. Maersk now expects 2014 earnings to be “significantly above” 2013 earnings.
Maersk is a bellwether for world trade, and its financial results support the World Trade Organization’s forecast that world trade will grow 4.7% this year. Longer term, the outlook is even more promising: Citigroup‘s economists project world trade will grow annually by 5.25% on average during the next four decades, swelling the dollar value of trade to $287 trillion by 2050 from $37 trillion in 2010.
Transportation Stock: Textainer Group Holdings
That said, I’m not really interested in Maersk. I’m interested in Bermuda-based Textainer Group Holdings (NYSE: TGH), the largest shipping container provider in the world. Textainer leases its container fleet to a customer base of approximately 400 lessees, including Maersk.
I prefer Textainer because ocean shipping is marked by sustained periods of vessel supply/demand imbalances due to multi-year ordering and production cycles associated with the manufacture of new vessels. These long cycles require shipping lines to estimate market growth many years into the future – a difficult proposition.
Textainer, in contrast, is insulated from the risks of these long cycles by the relatively short production time associated with manufacturing new containers. Lead times for new orders are typically only a few months, so the rate of ordering can be quickly adjusted to reflect unexpected market changes. This means that Textainer doesn’t suffer through cycles of booms and bust like the big shipping lines.
For Textainer, most everything just continually moves forward: Annual revenue of $226.5 million in 2005 has progressively moved to $545 million in the past 12 months. Over the same period, EPS has moved to $3.14 from $1.63. For 2015, Revenue is expected to move further still, to $597 million, while EPS should move to $3.35.
Bottom-line and-top-line growth, in turn, translates into a stable dividend marked by dividend growth.
Though only listed on the NYSE since 2007, Textainer has actually been around since 1979, and has paid a stable or increasing dividend 24 consecutive years. Since debuting on the NYSE, Textainer has increased its quarterly dividend 17 times. As of late 2014, Textainer pays $1.88 per share, which produces a 6.2% yield.
The dividend payments have averaged roughly 43% of Textainer’s net income since it listed on the NYSE. Though Textainer continually rewards shareholders with a rising stream of cash, it retains sufficient earnings to invest for growth.
Retaining sufficient income to fund growth is important. I mentioned the expected long-term growth in world trade, but containerized cargo growth is particularly robust, with volume growing nearly 10% in recent years.
Not surprisingly, Textainer is growing too. Revenue is expected to grow $590 million in 2015 compared to $529 million last year. Earnings per share are expected to come it at $3.35 next year, which means Textainer trades at a cheap 9.1 forward earnings multiple. Toss in a 6.2% yield, and Textainer Group Holdings is placed right in the sweet spot of income investing.
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