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Ben Reynolds
Ben Reynolds
Articles (674)  | Author's Website |

Warning: Overvaluation, Unsustainable Dividend and Extreme Dilution

See why Student Transportation may not be able to sustain its dividend if any 'road bump' in business operations happens

June 15, 2017 | About:

(Published by Nick McCullum on June 14)

On the surface, Student Transportation (NASDAQ:STB) has two characteristics that make it appealing to dividend investors.

The first is its dividend yield. Student Transportation is trading at a dividend yield of 7.4%, making it a member of the short list of high dividend stocks with 5%-plus dividend yields.

You can see the full list of 416 stocks with 5%-plus dividend yields here.

The second noticeable characteristic of Student Transportation is that it pays monthly dividends.

Monthly dividends are ideal for investors that rely on dividend income to cover their expenses, such as retirees. For nonretirees, monthly dividends also allow for shorter compounding periods and superior long-term total returns.

You can see the full list of all 29 stocks that pay monthly dividends here.

A high dividend yield combined with monthly dividend payments is powerful for income-oriented investors. For these reasons, Student Transportation may make an appealing investment.

But further research indicates that Student Transportation is overvalued, and its dividend is likely unsustainable.

Business overview

Student Transportation is the third-largest provider of student transportation and the largest publicly traded company in this industry.

The company was founded in 1997 by Denis J. Gallagher, who continues to serve as the company’s chairman and CEO. Student Transportation celebrated its 20th anniversary in May. The company executed its initial public offering on the Toronto Stock Exchange in 2004; in 2011, the company became cross-listed on the NASDAQ.

Student Transportation’s head office is located in Barrie, Ontario, Canada. With that said, the majority of the company’s revenues are derived from the U.S., and the company reports financial results in U.S. dollars. Investigative investors should note that Student Transportation files its regulatory filings via SEDAR, the Canadian equivalent of EDGAR (a database and searching system maintained by the Securities & Exchange Commission), making the company’s financial statement slightly elusive if you are unsure where to look.

Growth prospects

Student Transportation has experienced very good growth in recent years.

STB Student Transportation Selected Financial Metrics

Source: Student Transportation Investor Relations Website

The company has grown its revenue at a rate of ~12.9% over the past four years and its adjusted EBITDA at a rate of ~13.7% per year during the same time period.

Student Transportation has also expanded geographically.

Although it started as a Canadian-focused enterprise, the company now generates ~90% of its revenue from the U.S. The company’s key areas of operations can be seen below.

STB Student Transportation Areas of Operation

Source: Student Transportation Fact Sheet

Although Student Transportation now has a substantial geographic footprint, the company still has a long growth runway. There are many markets that remain unpenetrated by this company.

Further, it has a large opportunity to improve its market share.

According to company regulatory filings, it is estimated that North American educational institutions spend approximately $24 billion on transportation services each year. Student Transportation generated $600 million of revenue in 2016, which amounts to a market share of ~2.5%.

Yet, Student Transportation’s regulatory filings indicate that it is the third-largest company in its industry. This suggests that the industry is dominated by a large number of small players, meaning that consolidation will likely be a considerable driver of Student Transportation’s future growth.

It should be noted that Student Transportation generates very little revenue during the summer months. Since school is not in session, the only money collected by Student Transportation during this time period is from summer camps and other more short-term business arrangements.

To help compensate for this, Student Transportation reports a full year’s worth of amortization and depreciation during the 10 months in which school is in session. By accounting for the depreciation of fixed assets in this manner, Student Transportation creates more stability in its quarter-over-quarter earnings. The summer months are still tough for Student Transportation, and its fiscal first quarter (beginning July 1) often reports an operating loss.

Competitive advantage and recession performance

Student Transportation’s competitive advantage comes from its long-dated operating contracts with educational institutions. The company’s contracts typically last between eight and 10 years, and Student Transportation enjoys a high ~95% renewable rate from its customers.

With that said, Student Transportation is not recession resistant.

The company’s earnings-per-share history during the last recession and for many years after can be seen below:

  • 2006 earnings per share: (26 cents).
  • 2007 earnings per share: (33 cents).
  • 2008 earnings per share: (22 cents).
  • 2009 earnings per share: (16 cents).
  • 2010 earnings per share: 5 cents.
  • 2011 earnings per share: 3 cents.
  • 2012 earnings per share: 3 cents.
  • 2013 earnings per share: 5 cents.
  • 2014 earnings per share: 2 cents.

Student Transportation operated at a sustained loss during the last recession and barely reports a per-share profit today. This company should not be seen as a defensive position in an investment portfolio.

Valuation and expected total returns

Although Student Transportation’s business model may appear sound on the surface, the company’s valuation and dividend safety lead me to recommend avoiding this stock.

As I write this article, Student Transportation’s stock price is $5.92.

In 2016, the company reported earnings per share of 6 cents. The company’s current stock price is trading at a price-earnings (P/E) ratio of ~99 – much too high for any company, even a high-growth internet stock.

With that said, Student Transportation operates in a very capital-intensive industry, and it may be possible that the company records substantial depreciation and amortization expenses that artificially reduce the company’s earnings and make the P/E ratio meaningless as a valuation metric.

To counteract this, we can calculate alternative valuations, perhaps using price/EBITDA. To calculate EBITDA, we must use the company’s income statement, shown below.

STB Student Transportation Income Statement

Source: Student Transportation 2016 Financial Statements

Student Transportation reported a "Depreciation and depletion expense" of $48 million, an "Amortization expense" of $3 million, interest expense of $15 million and income before income taxes of $9 million in 2016. Adding these numbers together and dividing by the 110 million diluted shares outstanding gives EBITDA per share of 68 cents.

The company’s current stock price of $5.92 is trading at a price/EBITDA of ~9.

This illustration is not meant to advocate using the price/EBITDA metric as a valuation metric. I actually recommend against using alternative valuation methods or fancy accounting metrics in 99% of circumstances.

Rather, it is to show how grossly overvalued Student Transportation has become. The stock is trading at 9x EBITDA while many other far superior companies are trading at 9x earnings, or less (CIBC [CM], Ford [F] and General Motors [GM] come to mind).

Thus, Student Transportation’s excessive valuation is enough to keep me far away from this stock.

But what about the company’s dividend?

Student Transportation currently pays a monthly dividend of 3.667 cents which yields 7.4% on the company’s current stock price of $5.92.

While this dividend yield is certainly attractive, it is highly unsustainable. Using 2016’s earnings per share, Student Transportation currently has a payout ratio of more than 700%.

So how is the company paying this dividend?

Well, stock issuances certainly have something to do with it. Student Transportation’s shares outstanding have increased by ~366% over the past decade.

A dividend cut is inevitable for this company, which would trigger an automatic sell using The 8 Rules of Dividend Investing. Rather than buying this stock now only to sell in the event of a dividend cut later, it is best to avoid Student Transportation completely.

Sure Dividend advocates long-term investing in high-quality dividend stocks. While Student Transportation has some of the qualitative characteristics of a high-quality business, its excessive P/E ratio and unsustainable payout ratio mean that this is highly likely to be an unprofitable stock for long-term investors.

Final thoughts

Student Transportation’s high dividend yield and monthly dividend payments are (on the surface) highly attractive to dividend investors.

Some investigation reveals that the company is trading at a sky-high P/E ratio and is paying a highly unsustainable dividend.

Thus, investors should avoid this stock and find other alternatives.

Disclosure: I am not long any of the stocks mentioned in this article.

About the author:

Ben Reynolds
I run Sure Dividend, a website that finds high quality dividend stocks for long term investors using the 8 Rules of Dividend Investing.

Visit Ben Reynolds's Website


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GuruFocus has detected 7 Warning Signs with Student Transportation Inc $STB.
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