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Why This Shipping Stock Makes a Great Long-Term Pick

While searching for a company with a large market share and consistent, high divdend payments, I stumbled upon Textainer Group Holdings (NYSE: TGH  ) . Upon further research, I realized that I had found one gem of a company. 

Its business is simple: The company first buys containers or intermodals --- the metal boxes normally seen in shipyards. It then leases them out to customers, including large and small shipping lines, freight forwarding companies, and even the US Navy. Textainer's income comes mainly from leasing these boxes, but it also receives some income from the disposal of old containers. You can see a container's roughly 13-year life cycle, from its acquisition to its disposition, below:

Source: Textainer August 2013 Presentation.

This is an incredibly stable business, for two simple reasons:

  1. 95% of the world's goods are transported using such containers.
  2. Shipping companies need a leasing service, since it's not economical to buy containers directly. 

Since demand for shipping containers rises and falls,  shipping companies would have to store any containers they owned for most of the year. These stored containers would only incur inventory costs, which simply increase companies' operating expenses. In addition, containers take time to manufacture, resulting in tremendous inefficiency, since periods of higher demand tend not to last long. Companies like Textainer provide such companies with the flexibility to quickly lease more or fewer containers, depending on demand.

5 more reasons Textainer's a promising long-term stock
First, Textainer is the largest company of its kind in the world. With almost 3 Million TEUs (twentyfoot equivalent units) of containers, it is significantly larger than its compeitiors. Triton Container, TAL International  (UNKNOWN: TAL.DL  )  and Florens Group, the company's three largest rivals, all have less than 2,200 TEUs of containers at the moment.

This provides Textainer with economies of scale, enabling it to pay the lowest price per container (thus boosting margins) and also the financial ability to acquire smaller competitors. 

In fact, since it buys more containers at one time than any other competitior, Textainer is the most efficient company in its industry, judging from many metrics. For example, Textainer spends around $0.04 in selling, general and administrative (SG&A) costs per TEU, while competitiors like TAL and CAI International  (UNKNOWN: CAP.DL  )  spend twice that amount per TEU. 

Second, Textainer has a high fleet utilization number. With one exception, it has remained above the 90% mark since 2003; in 2009, this figure declined to the late 80% range due to the recession. Fleet utilization is currently at a healthy 94.1%, showing the strength of the company even when times are difficult. 

Third, the company has a stable customer base. Textainer's top 25 lessees lease about 80% of Textainer's containers. Although this may raise customer concentration concerns at first sight, further digging will reveal that the average customer within these 25 lessees has leased Textainer's containers for an average of 25 years. Since 76% of these huge shipping companies are on long-term leasing contracts with Textainer, you can be assured that much of Textainer's customer base will be retained into the future. 

Fourth, the company owns offices all around the world, from San Francisco to London , to Singapore and also to Australia. In fact, it currently owns over 150 offices and depots in North America, Europe, Africa, Asia and Oceania. With more offices than any other container company in the world, Textainer makes leasing easier for customers -- which makes customers more likely to choose it as their premier container-lessor over the long term.

Fifth, the company is shareholder-friendly. Textainer has more than doubled its quarterly dividends since its 2007 IPO. Quarterly dividends, currently standing at $0.47 (represents a yield of 5.28% at the moment,  have more than doubled from their 2007 figure of $0.20. This is reflected in the chart below.

Besides just this, the company maintained dividends throughout the 2008-2009 recession when times were difficult, reflecting the company's commitment to the dividend as well as its resilience to difficult times. In addition, its payout ratio, currently in the 50% range, implies that further dividend growth could be upcoming. 

Courtesy of Textainer August 2013 Presentation.

This stock can't be contained
I believe that Textainer, with its fabulous qualities and shareholder-friendliness, is very well-positioned to continue thriving into the future. Although times are slightly harder for the industry due to the current state of the shipping, Textainer has stayed strong. Best of all, shareholders can collect a rich dividend in excess of 5% while waiting for Textainer's shares to appreciate. 

Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

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  • Report this Comment On November 09, 2013, at 9:01 AM, jabez1 wrote:

    Very nice explanation. This article contains a level of detail that is missing from many Fool stories.

  • Report this Comment On November 12, 2013, at 7:46 AM, OngKangWei wrote:

    Thank you for the compliment jabez!

  • Report this Comment On December 03, 2013, at 1:53 PM, blackbeardan wrote:

    Great analysis.

    What do you think about CAP? Management has talked about initiating a dividend on last two earnings call. At 8X 2013 earnings and a book value near $19, could this one be ready to catch up with peers TAL and TGH?

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12/31/1969 7:00 PM
CAP.DL $0.00 Down +0.00 +0.00%
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TGH $7.49 Down -0.17 -2.22%
Textainer Group CAPS Rating: *****