Back in late December, I went scouring through the market’s dividend-paying stocks in search of the one that I would call 2013’s best bet. The winner of that contest was Textainer Group Holdings Limited (NYSE:TGH), a company that focuses on meeting the needs of the shipping industry by leasing intermodal carriers to businesses around the world.
Why the sudden jump in 2013?
Before getting into why the company seemed to disappoint on earnings, however, I think its instructive to look at how the last two months have played out. Many companies related to the shipping industry — not just Textainer — have boomed over that time.
Part of this may have had to do with the fact that many investors feel the shipping industry has recently reached an all-time low. For example, in a relatively unprecedented move, DryShips Inc. (NASDAQ:DRYS) recently sold two unfinished tankers; but instead of getting paid for the goods, DryShips actually paid someone else to take them off of its hands.
Another metric many investors point to is the Baltic Dry Index (BDI), which measures the price of moving major raw materials over several key routes. The BDI hit an all-time high of about 11,500 back in May of 2008, and even though some global economies and the stock market have recovered from the Great Recession, the BDI today is still down an astonishing 93% from its 2008 highs.
One final piece of information to keep in mind is that in late January, the Ontario Teachers’ Pension Plan made the decision to buyout seacube container leasing ltd (NYSE:BOX) for a roughly 15% premium to its previous price. Whenever a buyout like that happens in an industry, it tends to raise the premium on the rest of the major players.
On to the earnings…
Now that you’ve got the background, I can fill you in on earnings. For the fourth quarter of 2012, Textainer was able to increase revenue 9.4%, and earnings per share by 10.3%. The earnings figure handily beat analyst expectations, but the revenue number did not. I have no doubt that part of the earnings disappointment was simply due to the fact that a great quarter was already baked into the stock price.
Another important thing to note is that, while it may look like Textainer’s decision to raise its dividend by $0.01 looks stingy, it’s actually not. The dividend raise was a quarterly, not annual one. Taken on a year-on-year basis (once the newest dividend is paid out), Textainer’s dividend will have grown by almost 26% over the past year.
Here’s what you really have to keep an eye on
Although its nice to digest these numbers, there’s really two stories taking place that investors need to watch. When the BDI was reaching all-time highs, shipping companies were tripping all over themselves trying to up their inventory. By the time that inventory had come online, the market crashed. There was an abundance of supply, and very little demand.
CEO of the aforementioned DryShips, George Economou, recently summed up how his company — and many others — is now responding: “The reduction or elimination of CAPEX has become a top priority .” In other words, “We’re eliminating our costs wherever we can.”
This is important to note because Textainer is basically taking the opposite approach. The top of the company’s latest release boasts that the company spent $1.2 billion in 2012 building out its fleet.
Over the course of the year, the number of intermodal carrriers under the company’s control increased 12.4%. And, whereas last year, Textainer owned 58.6% of all the containers under its control, that number skyrocketed to 72.7%.
This makes the company somewhat more vertically integrated. During boom times, it will do better, as the cost of managing containers that it owns is lower than leasing them. But during bust times, the company will either have to mothball, or sell those containers to raise funds. The key to investing is figuring out where that market might be.
What’s a Fool to do?
Though I’ve been intent on buying shares for some time now, I haven’t gotten around to doing so. Rest assured, it’s on my list of things to do — and I believe Textainer is a good bet right now.
The article An Update on My Top Dividend Stock for 2013 originally appeared on Fool.com and is written by Brian Stoffel.
Fool contributor Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends Textainer Group (NYSE:TGH).
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