Can This High-Growth Dividend Stock Continue to Fly?

Since I recommended Air Lease (AL 0.18%) in The Motley Fool's October Roundtable, 37 Fools have rated it to outperform the S&P 500 in CAPS. That's tremendous! I hope even more investors put it on their watchlists or perform more research and add it to their portfolios. The air leasing company makes steady progress toward its ambitious growth objectives each month, but with third-quarter results due to be announced Thursday after the market closes I thought it was time to check in again.

What does Air Lease need to do to keep Wall Street happy? How can you gauge the company's growth? Can it continue to run laps around competitors such as Aircastle (AYR), AerCap Holdings (AER 0.18%), and Fly Leasing (FLY)? Here are a few things to look for when the company reports.

Undefeated against Wall Street
Air Lease has reported earnings as a publicly traded company for a mere 10 quarters -- all of which bested Wall Street estimates for earnings per share. The company will nudge the streak to 11 on Thursday if it tops the consensus of $0.45 per share, according to the seven analysts included in estimates at Bloomberg. The company will eventually meet or miss expectations, but at this point how can you bet against it? Here's how past years and quarters have caught Wall Street by surprise:

Source: Data compiled by Bloomberg.

While it is nice to beat Wall Street estimates they're really nothing more than a short-term guessing game. The long-term fundamentals will remain intact as long as the global economy doesn't stall and the company continues to grow its fleet. The company can only control one of those factors, and it's doing a great job.

Giddyup for growth!
One of the reasons Air Lease has been a favorite company of mine since I wrote for the Foolish Blogging Network is the simple fact that I can refer to its collection of aircraft as a stable -- one spread across multiple continents that is looking to add quite a few more horses. Call it whatever you want; this how the number of aircraft has grown in past quarters and how management expects it to grow in future years:

Source: Air Lease.

The best part about the bar chart above is that management has only revised its ambitious plans for growth in one direction: up. Halfway through 2011 the company expected to add a combined 51 aircraft in 2013 and 2014, but it guided for 68 additions in the same period at the beginning of 2013. In other words, management has bested its own lofty expectations by 33%!

There's no question that the fleet is the driving force behind growth. The more aircraft the company owns, the more it can lease to airlines throughout the world, and the more revenue and cash flow it can generate. Continuing to acquire brand-new aircraft at a furious pace will allow the company to easily outgrow its competition in the next few years.

How to view the industry
The air leasing industry is large enough to sustain many companies, but not every company is well-positioned to capitalize on growing demand. For instance, airlines in emerging economies tend to lease aircraft at a higher clip because they don't always have access to the large amount of capital required to purchase aircraft of their own. New, fuel-efficient aircraft have astonishing leasing appeal for the same reason -- they're cheaper to operate and maintain -- which happens to be a major advantage for Air Lease.

Consider how the industry compares on fleet age, which can serve as a rough guide on fuel efficiency:

*Includes cargo planes. Source: SEC filings

AerCap has the second-youngest fleet in the industry, although it has already encountered obstacles when attempting to lease its nine-oldest aircraft (all older than 15 years). The company is by no means struggling financially, and the dinosaurs only represent 2% of the total fleet, but it has decided to sell new aircraft in recent years to make up for impairment charges associated with asset writedowns. Unfortunately, a similar fate eventually awaits all companies in the industry. That day is much closer for Fly Leasing and Aircastle, with a larger percentage of their fleets involved.

So, the entire industry's objective can be broken down in simple terms: Capture as much value from an aircraft before its useful life is over. It also helps to continually grow so that assets that are not useful can be replaced at a sustainable pace. Luckily, Air Lease will add enough new aircraft in the next decade to mitigate fears of an aging fleet. For instance, the company recently finalized an order for 30 Boeing 787-10 and three Boeing 787-9 Dreamliners. Although they'll be delivered between 2019 and 2023, they are 25% more fuel efficient than similarly sized airplanes today and 10% more efficient than those currently being designed for the future. Staying true to its cutthroat growth initiatives, Air Lease today owns 30% of all 787-10 orders worldwide.  

Foolish takeaway
I see Air Lease as one of the best growth investments on the market (that doesn't mean there aren't risks). Investors who own the company today can capture tremendous growth now and then enjoy above-average dividends -- AirCastle pays 4% and Fly Leasing pays 6% -- when growth slows and cash flow piles up. What a horrible problem to own!

Management at Air Lease is determined to build the greatest air leasing company the world has ever seen. Founder and CEO Steven Udvar-Hazy will have to outpace his former company, International Lease Finance, which owns more than 1,000 aircraft. There is quite some time before Air Lease grows its stable to that size, but I sure as heck wouldn't bet against Udvar-Hazy. Check back later this week when I dig into third-quarter results.