An Unsung High-Yielder

 | Dec 14, 2012 | 1:00 PM EST  | Comments
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Stock quotes in this article:

ayr

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fig

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frd

According to the latest policy pronouncements from the Federal Reserve, our low-interest-rate environment is likely to be with us for quite a while longer. This continues an unprecedented period of historically low yields, even in the face of substantially expanding government debt.

This series of Federal Reserve easing efforts has forced many income investors out of their comfort zone in search of yield. Typical sources of income such as certificates of deposit yield next to nothing. In addition, typical income-producing sectors within the stock market, such as utilities, look overpriced at these levels.

For my own income portfolio, I have relied on a variety of atypical yield plays within the energy master limited partnership space, hotel real estate investment trusts and some small-cap, high-yield stocks such as Friedman Industries (FRD) to provide the distribution and dividend payouts I desire to maintain a solid income stream. Another unconventional yield play I recently added to this portfolio is the aircraft lessor Aircastle LTD (AYR). The company has had some positive catalysts recently, it yields over 5%, and it is cheap at these valuations.

Recent positives for Aircastle LTD:

  • Fortress Investment Group (FIG) exited its substantial stake in the firm over the summer. This removed a substantial selling overhang on the stock.
  • Aircastle LTD took advantage of the low-interest-rate environment and just issued $500 million in senior notes at 6.25%. The offering was oversubscribed, and proceeds will be used for general corporate purposes, which could include buying additional aviation assets or retiring higher-priced debt.
  • Aircastle LTD initiated a $50 million stock buyback program that should retire 4% to 6% of the outstanding float in 2013.
  • Deutsche Bank just initiated the shares as a Buy this week with a $17 price target.

Aircastle LTD manages more than 150 plans in over 30 countries. The stock was crushed during the financial crisis and moved from $40 a share pre-crisis to $3 a share on liquidity concerns, as most of its fleet was purchased from 2006 to 2008. It has put a more conservative debt structure in place since then, and the stock has quadrupled off its crisis lows.

Here are four additional reasons Aircastle LTD is still a good income pick at $12 a share:

  • The stock yields 5.5%, and the company has raised dividend payouts 50% since it emerged from the financial crisis. Its payout ratio is a conservative 40%.
  • The company has crushed earnings estimates for six straight quarters. The average beat over consensus estimates has averaged more than 40% over that time period.  Consensus earnings estimates for both fiscal 2012 and fiscal 2013 have risen nicely over the last three months.
  • The eight analysts who cover the stock have a median price target north of $16 a share on AYR. Price targets range from $14.50 to $18 a share.
  • Investors have shown concern that a third of the company's revenue comes from Europe, but it is important to remember that more than 50% of revenue comes from faster-growing emerging markets. The stock also sells at low 7x forward earnings and 60% of book value.

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