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Global Flights Lift Aircastle

10/14/2015 7:00 am EST


Tim Plaehn

Investment Research Analyst, Investors Alley

Our latest new recommendation is a company that owns commercial aircraft and leases them to airlines around the world, notes Tim Plaehn, editor of The Dividend Hunter.

Aircastle Limited (AYR) is not interested in working with the large US airline and global European companies. Instead, it prefers to provide aircraft leasing solutions to smaller airlines and national airlines.

As of the 2015-second quarter, the company owned 161 planes with a book value of $6.1 billion. The company has 52 airline customers located in 32 different countries.

Currently about 40% of the fleet by book value is operating in Asia and 30% is in Europe. The rest operate in countries like South Africa, Brazil, Indonesia, and Chile.

Aircastle is a very profitable company. It generate 12.5% lease rental yields against a 4.5% cost of capital. The result is a 9% net cash interest margin.

The high cash returns on leases combined with the conservative debt structure have historically produced a 12% annual return on equity.

Currently the global airline sector is operating with a couple of positive tailwinds. Passenger traffic growth is steady at about 6% per year. Low fuel prices are producing very profitable results for airlines.

Aircastle is playing these trends by acquiring relatively new, narrow body jets that can be leased at attractive lease rates.

The current AYR dividend rate is $0.22 per quarter/$0.88 per year, which requires $36 million per quarter, $72 million for a half year, and $144 million for the full year.

Compare this to the $250 million of cash flow generated in just the first half of 2015 and you get an idea of the safety of the AYR dividend.

AYR currently yields 4.3%. This stock is a long-term total return play, with an attractive entry yield.

I have been following the company since it went public in 2006. I have not made it a Dividend Hunter recommendation because over the last couple of years, the market has been pricing the stock to yield below 4%.

Aircraft Leasing has been a personal, long-time favorite stock, but until now it hasn’t yielded enough to be included in our model portfolio. 

The recent correction, however, has driven down the price and bumped up the yield to the point that it meets my criteria. So let's take advantage and add this very attractive income and total return stock to our portfolios.

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