In the aircraft leasing industry, Aircastle (AYR, Financial) is among the attractive stocks that have the potential to deliver strong shareholder returns over the long-term. This article discusses the outlook for the stock and the key investment positives with a medium to long-term investment horizon.
The first reason to be bullish on Aircastle is the company’s lease term of 5.6 years as of 1Q15. The lease term will ensure that there is steady revenue and cash inflow in the coming years. In turn this will ensure that the company’s dividend payout of $0.88 per share sustains in the foreseeable future. Further, as new aircraft are added to the company’s fleet, the dividend payout will increase further. I therefore view Aircastle as a dividend stock more than a high growth stock. While the company’s growth will remain attractive, the dividend payout will be steady and robust.
Coming to the revenue growth driver for Aircastle, the company has a planned acquisition of $770 million in new aircraft in 2015. As these new aircraft join the fleet with long-term lease, the company’s revenue and cash flow visibility will also get a boost. The addition of new aircraft will also lower the aircraft age and this is important as modern aircraft have a higher lease rental and they also secure relatively longer term contracts. Therefore, robust growth is lined up for Aircastle in FY15.
The reason to believe that the company’s growth momentum will continue into 2016 is the high financial flexibility. This will allow Aircastle to go ahead with robust expansion plans in the coming years. As of 1Q15, Aircastle had a total aircraft fleet of 152 with 99 unencumbered aircraft. Therefore, there is significant room to take secured debt for further aircraft acquisition in FY15 or FY16. The industry outlook is bright and the company has the financial muscles to take advantage of positive industry conditions.
From a shareholder value creation perspective, I have already mentioned that Aircastle pays a robust dividend of $0.88 on an annual basis. Besides the dividends, the company has also repurchased shares worth $138.5 million since 1Q11. Therefore, Aircastle is focused on shareholder value creation and I must add here that the stock has trended higher by 15.6% in YTD15. In my view, the positive upside momentum for the stock will continue considering the strong aircraft acquisition plan for FY15.
From a liquidity perspective, Aircastle has $600 million in unsecured revolving capacity available as of 1Q15 along with unrestricted cash of $300 million. Therefore, the company is fully funded for FY15 capital expenditure and I would not be surprised if the capital expenditure program for FY15 is expanded in the coming quarters. This will serve as another upside trigger for the stock.
In conclusion, the aircraft leasing industry has strong growth prospects with strong demand in Asia to sustain for years to come. Aircastle is well positioned in the industry with strong growth robust financials, long lease term and a high financial flexibility. In my view, investors can consider exposure to the stock at current levels with an investment horizon of 3-5 years.
