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The Airplane Lessor with a
High-Flying 11% Yield |
Published:
February 11, 2008
Babcock and Brown Air Ltd. (NYSE: FLY, $17.97), an
Irish company that listed on the NYSE at the end of September,
owns and leases commercial jets. It started operations with 47
planes and added another 7 planes in December.
FLY plans to pay out its first quarterly dividend of $0.50 per
share later this month. That amounts to $2.00 a year,
which gives the company a hefty yield of 11.1%.
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Although Babcock and Brown Air is a new company, the firm has
deep roots in the leasing industry. Parent company Babcock and
Brown Aircraft Management is the fifth-largest aircraft leasing
company in the world (measured by the size of its aircraft
portfolio) and has operated since 1990. The firm holds a 13.2%
interest in FLY and will arrange FLY's leases, dispose of
aircraft, market the planes, and collect lease rent.
The outlook for aircraft leasing firms is currently bullish.
Several major airplane manufacturers cannot deliver various
models until 2009 or 2010. Meanwhile, studies project that air
travel demand will grow roughly +5% a year for the next 20
years.
Against this backdrop, FLY is well-positioned with a relatively
new fleet of high-demand aircraft and diversified contracts with
carriers in 16 different countries. In addition to having
long-term agreements with these airlines, the company has
interest rate and currency hedging programs in place, all of
which should help maintain steady cash flow and dividend payouts.
There are headwinds for investors, however. FLY is classified as
a passive foreign investment and as such does not quality for
the reduced dividend tax. Meanwhile, replacing aging aircraft is
a capital intensive proposition, and while FLY won't face this
dilemma in the immediate future, it could be more vulnerable in
the long-term if it pays out its cash flow in dividends. The
company could also suffer in an economic slowdown. In that
environment, reduced business and personal travel could mean
airlines depend less on the leasing market to add capacity.
Still, FLY's 11%-plus
yield is attractive at this time, and the company appears
able to sustain its dividend in the immediate future.
Action To Take ---> I plan
to watch Babcock and Brown Air closely over the coming months.
Specifically monitoring what percentage of its free cash flow it
pays out and therefore how sustainable its dividend is in the
long term. More aggressive investors may want to step on board
while the shares are attractively priced.
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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