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Dividend stock with a 10% yield smooths ride in volatile markets

Defensive stocks continue to attract investors interest given the volatile market conditions and uncertain global economic growth conditions. Discussed below is a stock with bright prospects for the year ahead, that also provides investors with a 10 per cent yield.

Student Transportation Inc. is a North American provider of school bus transportation with approximately 13,000 vehicles. The stock is listed on the Toronto Stock Exchange and on Nasdaq.

On Feb. 16, the company reported better-than-expected second-quarter fiscal 2016 results that drove the stock higher by 9 per cent. Revenue increased 6 per cent year-over-year to $167-million (U.S.). Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at $41.5-million, up 15 per cent year-over-year. Also notable, was the improvement in EBITDA margins, expanding to 24.8 per cent from 22.9 per cent last year.

The company has delivered solid top-line growth and management expects this to continue. Management has strong revenue visibility because of the long-term nature of their contracts and is guiding to approximately 7 per cent year-over-year revenue growth in fiscal 2016. The company's revenue has grown from $305-million in fiscal 2011 to over $550-million in fiscal 2015.

New contract wins along with higher prices should benefit the top line. The company is currently in the midst of the bidding season for the 2016-17 school year. "[W]e're now seeing more meaningful pricing power, on both our renewals and with our new bids," CEO Denis Gallagher notes.

In addition, Student Transportation's margins may steadily improve. Fuel expenses are trending down thanks to lower oil prices, giving the company's margins a lift. The company is also benefiting from operational improvements with the new software on its buses, helpful in reducing maintenance costs. Furthermore, management has made the school bus routes more efficient, allowing the company to reduce between 350 and 400 buses from its fleet.

Returning capital to shareholders

Student Transportation pays shareholders a monthly dividend of 3.667 cents a share, or 44 cents a year, equating to an annualized dividend yield of roughly 10 per cent.

In mid-2015, management changed their dividend to U.S. dollars from Canadian dollars as almost 90 per cent of the company's revenue and cash flows were denominated in U.S. currency. The payout ratio was just more than 70 per cent in fiscal 2015. Management forecasts the payout ratio will be in the 70-per-cent to 71-per-cent range in fiscal 2016, and down the road, decline to the low-to-mid 60-per-cent range.

The company has been active in their share buyback program, repurchasing approximately 332,000 in December and January.

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple slightly below its three-year historical average, suggesting there is room for multiple expansion.

Analysts' recommendations

According to Bloomberg, there are two analysts with a buy recommendations, and two analysts with hold recommendations, with the average one-year price target at $6.86 (Canadian) implying the shares have further upside potential. Price targets range from a low of $6.50 to a high of $7.25. The consensus EBITDA forecast is $77.6-million (U.S.) in fiscal 2016, rising 16 per cent to $90.2-million in fiscal 2017. Analysts have been revising their 2017 forecasts higher, which is positive.

Chart watch

The stock is steadily recovering from its aggressive sell-off in 2015, with the share price tumbling 29 per cent last year. The stock price has had a nice rally since Jan. 11, rising to more than $6 (Canadian) from $4.34, appreciating 40 per cent. The stock price climbed above both the 50-day and 200-day moving averages on high volume – a positive technical sign.

There is downside support at $5.50, where its 200-day moving average lies, and, failing that, at $5, at its 50-day moving average. There is overhead resistance around $6.50, then at $7.

The relative strength index is at 80, suggesting the stock is at an overbought level. Generally, a reading at or above 70 indicates an overbought condition. However, a stock can remain overbought for some time.

Bottom line

For investors looking for income, shares of Student Transportation represents a relatively safe ride amidst the market volatility. The company provides investors with a steady stream of attractive dividends, compelling in the low interest rate environment. I recommend accumulating shares at current levels.

I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.

The author does not personally own shares in the security mentioned in this story.

Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.

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