One Big Dividend That Dominates its Industry

Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In any of the industries I study, I look to find a company that has a leading position in their market.  As an added bonus, I love to see a company that not only leads, but dominates the industry through its leadership status.  Throughout history, many companies have developed a wide moat simply by being the top dog in a growing industry, and that appears to be the case for Textainer Group (NYSE: TGH), leader of the container leasing industry.

A Booming Industry

The status of the global shipping industry by fleet type:

<img src="/media/images/user_13988/container-ships_large.jpg" />

See that tiny sliver of "11" on the chart back in 1980?  Well that was container ship capacity then, and it is well over 162 now.  Posting a 9% CAGR over the last 30 years, the movement towards container ships has been a rapid one.  Furthermore, growth accelerated to 11% over the final 5 years of the chart.  Representing the core of many container businesses' operations, this global container shipping growth has lead to many happy shareholders over the last year.  With Textainer, TAL International (NYSE: TAL), and CAI International (NYSE: CAP) all within 3% of their 52-week highs, and SeaCube's (NYSE: BOX) recent agreement to be acquired by the Ontario Teachers' Pension Plan, it seems as if investors have finally taken notice of the industry's profitability.

With this growth being seen throughout the industry, however, does Textainer's leadership position make it the best investment of the group?  Let's start by looking at their current operations.

So Many Containers

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>TEU (000's)</strong> </td> <td><strong>Market Cap</strong></td> <td> <strong>Rev.</strong></td> <td><strong>10 Yr. Rev. Growth</strong> </td> <td><strong>3 Yr. Rev. Growth</strong></td> <td><strong>10 Yr. EPS Growth</strong></td> <td><strong>3 Yr. EPS Growth</strong></td> </tr> <tr> <td><strong>Textainer</strong></td> <td> 2,470</td> <td> 2.27B</td> <td> 476M</td> <td> 12%</td> <td>25%</td> <td>16%</td> <td>30%</td> </tr> <tr> <td><strong>TAL</strong></td> <td> 1,625</td> <td> 1.36B</td> <td> 572M</td> <td> 6%</td> <td>16%</td> <td>14% (9 Years)</td> <td>26%</td> </tr> <tr> <td><strong>SeaCube</strong></td> <td> 930</td> <td> 464M</td> <td> 195M</td> <td> -4% (5 Years)</td> <td>12%</td> <td>4% (5 Years)</td> <td>10%</td> </tr> <tr> <td><strong>CAI</strong></td> <td> 930</td> <td> 473M</td> <td> 160M</td> <td> 13%</td> <td>38%</td> <td>22%</td> <td>24%</td> </tr> </tbody> </table>

Sorry for all the horrendous numbers, but long story short, Textainer is the leader in Twenty-foot equivalent units (TEU's) and has some of the most consistent growth rates of the group.  With only one year of a shrinking EPS, the company shows its resiliency in an industry where others have struggled to grow year in and year out.  

Despite having slightly lower revenues than TAL, Textainer manages a larger fleet, and more importantly generates more of its income from long term contracts.  By generally selling 5 year leases to its customers, Textainer has created an incredibly sticky business.  With long term contracts composing 80% of company revenues, Textainer is able to hold a "stickiness advantage" over TAL, which only has a 68% margin.

Furthermore, industry data shows shipping lines are rapidly becoming more willing to lease their containers, rather than own them.  With historical data showing lessors accounting for 45% of container purchases, 2012's report of an increase to 65%+ ownership represents quite a jump for the industry as a whole. 

The Valuations

With the Ontario Teachers' Pension Plan announcing their agreement to buy 100% of SeaCube's shares for $23 apiece, we will leave the company out of the following valuations.  The shares were purchased at a 13% premium to their share price on the Jan. 18.

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>P/E & FP/E</strong></td> <td><strong>P/CF</strong></td> <td> </td> <td><strong>Cash/Debt</strong></td> <td><strong>5 Yr. PEG</strong></td> <td><strong>Profit Margin</strong></td> <td><strong>Div %</strong></td> <td><strong>Payout %</strong></td> </tr> <tr> <td><strong>Textainer</strong></td> <td>10/10</td> <td>8</td> <td> </td> <td>113M/1.9B</td> <td>1.28</td> <td>45%</td> <td>4.3%</td> <td>39%</td> </tr> <tr> <td><strong>TAL</strong></td> <td>11/10</td> <td>4</td> <td> </td> <td>53M/2.7B</td> <td>1.06</td> <td>23%</td> <td>6.1%</td> <td>58%</td> </tr> <tr> <td><strong>CAI</strong></td> <td>8/6</td> <td>4</td> <td> </td> <td>15M/873M</td> <td>0.45</td> <td>38%</td> <td>0%</td> <td>0%</td> </tr> </tbody> </table>

Using these valuations, it is clear that CAI is the best priced grower of the group.  With a PEG of 0.45, and very low P/E and P/CF valuations, it looks like it could be the potential breakout candidate of the group.  However, with the incredible volatility in the shipping industry, I am hesitant to throw money at CAI.

First, they only have $15 million in cash on hand versus a debt load that is close to $1 billion.  Regardless of how fast they grow, this number keeps me nervous.  Second, during the recession in '08-'09, CAI posted an EPS of -$1.55.  As I mentioned earlier with the volatility in the industry, I don't like to see numbers like this, which brings me to my final point.  I simply don't see the benefits to riding such a volatile investment out, while receiving no dividend in return.  With Textainer offering generous growth rates and a 4.3% dividend, it seems to be the safer play.

My Foolish Stance on the Industry

Overall, the industry's future looks incredibly promising, but I'm willing to give only one of these three picks an outperform call on CAPS, and that is Textainer.  With a healthy dividend and payout ratio, a fair valuation, the best margins of the group, and the most consistent and safest growth in the industry, I feel Textainer offers investors the best long term potential.  

Seeing catalysts in its expansion of its refrigerated and speicalized lines, Textainer has more to offer than just its dividends and acquisitions.  Currently reporting only 8% of its fleet as refrigeration units and 4% as specialized units, Textainer is looking to greatly diversify their business to help navigate future economic downturns.

All in all, I found Textainer's final note in their presentation to ring true:

Organic Growth + Dividend Yield + Acquisitions = Total Return Opportunity for Shareholders

With this in mind, I'll stick with Textainer -- the true market leader -- as they are the safest company to bet on in an industry of promising returns.

joryko has no position in any stocks mentioned. The Motley Fool recommends Textainer Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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