Skip to main content

Seven year old Darcy McCain is helped onto a school bus by his mother Mary as he prepares for the first day back after the summer holidays on Tuesday September 3, 2013.Chris Young/The Globe and Mail

A rich dividend and seemingly recession-proof industry of transporting children to and from school each day has helped Student Transportation Inc. build a loyal market following, particularly among retail investors.

The investment has been rewarding for those who bought in over the last year, with shares rising more than 30 per cent on both the Toronto Stock Exchange and the Nasdaq. However, the ride has been bumpier for some longer-term shareholders. The dividend, yielding about 8 per cent, is what keeps many investors hanging on.

The Barrie, Ont.-based company, which reports its fourth-quarter results in mid-September, has been benefiting lately from lower fuel prices and other cost savings, including from new GPS technology that enables it to track bus locations and, in turn, shorten driving distances to reduce fuel consumption.

"This is a pretty steady business," said Barrington Research analyst Gary Prestopino, who recently initiated coverage of the stock with a target price in the range of $7 to $8 (U.S.). He also owns the stock personally. "This isn't a business where we will see dramatic upside surprises or dramatic downside surprises."

Mr. Prestopino says the company has increased sales and earnings for nine consecutive years, and expects operating margins will continue to improve as the business grows and scales. In the third quarter, revenue rose 11 per cent to $173.2-million, while net income was $3.8-million, or 4 cents a share, up from $1.9-million, or 2 cents, a year earlier.

Among the five analysts who cover the stock, three have a "buy" recommendation and two a "hold." The analyst consensus price target for Student Transportation over the next year is around $6 and $7.68 (Canadian).

Some risks for the company include competition and higher driver wages and benefits. Rising fuel prices are also a risk. However, the company says only 20 per cent of its fuel is exposed to fluctuating market prices. The other 80 per cent is either locked in with suppliers in advance of the school year, in contracts that protect it from price increases, or paid for directly by customers.

About 90 per cent of the operations are in the United States with the rest in Canada. The majority of the business is school bus transportation with more than 13,000 vehicles in 22 states, Ontario and Saskatchewan.

Growth across North America will be driven by acquisitions, new contracts and customers the company signs up to use its on-board bus tracking technology, says Student Transportation founder, chairman and chief executive officer Denis Gallagher.

"We grow by ABCs; acquisitions, bids and conversions," Mr. Gallagher said in an interview.

He said the company has slowed its acquisitions to concentrate on bids and conversions, which is getting school districts to have Student Transportation run its bus services.

Mr. Gallagher also points to cost cuts as a way to drive growth and maintain the company's attractive dividend.

He said the dividend would remain as is, with the intention of "growing into the yield."

"It takes time to build this kind of business," Mr. Gallagher said. "I can't hurt the people who have helped to build the company."

The company's goal is also to attract more institutional investors and remove doubt that the dividend isn't sustainable at its current annualized level of 44 cents per share.

Ryan Modesto, managing partner with 5i Research, isn't a huge fan of the stock because the company consistently issues shares or debt.

"If they didn't have such a high dividend, they wouldn't need to dilute current shareholders or take on debt," Mr. Modesto said. "We don't like that kind of inefficiency in the way they manage capital."

Still, he recognizes the dividend is a big attraction for many investors.

"If you really just want the income stream from it, it's okay, but we prefer something with a bit more financial flexibility that can grow shareholder value through capital gains and then maybe pay a smaller dividend," Mr. Modesto said.