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Uncovering a True Gem With a 7.98% Dividend Yield

Have you ever thought about the school bus transportation industry as being a booming business? Well, if we define booming business as a stable, dividend-paying company that offers visibility as well as growth, then maybe we should be thinking of Student Transportation Inc. (TSX:STB)(NASDAQ:STB) in this way.

It has a $681 million market capitalization, a 7.98% dividend yield, and revenue that has increased from approximately $120 million in 2006 to $600 million in 2016, representing a growth rate of 400%, or a cumulative average growth rate of 17.5%. While this has been done mostly through acquisitions, it has given the company a strong foothold in the school bus transportation industry and the benefits of scale.

Here are the reasons why I believe investors should own this stock.

Dividend yield

The 7.98% dividend yield means this stock makes a great addition to investors’ income-producing portfolios. Of course, we must also assess the safety of the dividend. Well, the fact is that the company has been paying its dividend for many years now. The problem, though, is that free cash flow less the dividend has been negative for many of these years, and this has meant equity issues as well as an increase in debt. There clearly is some risk involved here.

So, why do I still think this stock is a good buy? In my view, the risk/reward relationship is attractive given the opportunities ahead.

Stable and predictable

The company’s business is relatively stable and predictable. The revenue base is recurring and long-term contracted.

Technology is reducing costs

The company has invested in technology to follow the buses more closely. For example, there is software being used that will alert the company if a bus goes off its route, and there are GPS installations in the buses. The software reduces excess idling and fuel expenses.

Also, the company is improving efficiency by getting buses closer to capacity. Buses hold 77 students; management was seeing many of these buses operating with less than 30 students on board. This inefficiency is slowly being taken care of. In 2016, the company pulled 300 buses from circulation and ran more buses that were closer to capacity.

Growth in the managed service group

The student transportation industry is undergoing some exciting changes that Student Transportation is well positioned to benefit from.

The company’s new managed service group, formed in 2005, is its vehicle for growth. The target customers are the +100,000 private contractor fleets that lack supplier leverage and access, and the district-owned and operated market. This group offers consulting, online training fleet services, technology, and management and staffing for its target customers. This segment generated $0 in revenue in 2015, $5 million in 2016, and is expected to generate between $10 and $15 million in revenue in 2017.

This is an exciting area of growth because it is a revenue opportunity with minimal associated investment in assets.

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Fool contributor Karen Thomas has no position in any stocks mentioned.

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