Email – #1
** Welcome and Your Next Trade
Welcome to the Permanent Wealth Investor. You should by now have received the report “Your first six Alpha Bulldogs.” Don’t forget, to receive the first locked-in dividends on those Alpha Bulldogs you must invest at latest on the day before the “ex-dividend” date which in most cases means by next Monday, April 27.
While Alpha Bulldogs are never all that common, and become less common as the stock market rises, as it has for the past six weeks, you never know when a new one may arise, often on short notice. Short notice Alpha Bulldogs happen when the date on which the dividend is declared is only a few days before the ex-dividend date, after which investors cannot receive the dividend. I’m therefore happy to tell you that, as well as the Alpha Bulldogs you have heard about, a new Alpha Bulldog, with ex-dividend date also April 28 (so you must buy by April 27) has appeared within the last week.
This Alpha Bulldog is a fairly high-risk situation, and you should invest only a modest portion of your portfolio in it (no more than 5%). However its yield and share price parameters are exceptionally attractive, although in the current rising market its price is escalating. Since it is a relatively small company, with market capitalisation of only $300 million, we must be disciplined in buying it and set a firm price limit above which we will not chase the stock. If you miss it, you have my sympathy, but one of the most important disciplines of permanent wealth investing is not to chase a thinly traded share upwards. There will be other opportunities.
The company is Babcock and Brown Air Limited (NYSE:FLY). On April 15 it declared a quarterly dividend of 20 cents, which will pay on May 20 to shareholders who buy on April 27 or earlier (its “record date” is April 30.) On the basis of its last 4 quarters’ dividend payments of 20 cents each, totalling $0.80, it yields 15% at a share price of $5.33. You should not pay more than $6, at which point it yields 13.3%.
FLY is in the business of buying, financing, leasing and selling commercial jet aircraft and other aviation assets. At 31st December, 2008 its aircraft portfolio consisted of 62 aircraft, 48 narrow-body and 4 wide-body, comprising 34 Boeing and 28 Airbus. It is financed by an $850 million aircraft lease securitization, a $1.2 billion aircraft acquisition facility and its shareholders’ funds. Its headquarters is located in Dublin, Ireland, which has the advantage of a 12.5% corporate tax rate – making dividend payments relatively more attractive than for a US company.
The company is serviced and managed by Babcock and Brown Aircraft Management (BBAM), the world’s fourth largest aircraft leasing company with 25 years’ experience. That’s how the stock came to be beaten down. Babcock and Brown, the parent of BBAM, is an Australia-based international investment management group that was placed in voluntary administration (the Australian equivalent of Chapter 11) on March 13. As in a US Chapter 11 proceeding, that does not necessarily affect the operations of subsidiaries, and in any case FLY is separate from Babcock and Brown, but it explains why the shares are something of a bargain.
FLY has shareholder book value of $11.99 per share and has been solidly profitable – its 2008 EPS was $1.43 per share, so its dividend represented 56% of earnings, giving a decent cushion. It concentrates on modern, fuel-efficient, high-demand aircraft, so its asset quality is good, though as a leasing company it is highly leveraged with debt representing 80% of capitalization. It also has a cushion of $56 million of cash.
FLY has a permanent business model with no “self-liquidating” features, which should be able to increase earnings in a global economic recovery. While there are elements of risk, it thus qualifies as an Alpha Bulldog. With a yield of a minimum 13.3% and trading at under 50% of net asset value, it is an attractive investment.
Action: Buy Babcock and Brown Air Limited (NYSE:FLY) before April 27 at no more than $6, for a yield of at least 13.3% and a dividend of 20 cents on May 20.
Good Investing,
Martin Hutchinson
