Last week a stock on my Dividend Hunter service recommendations list received an all-cash buyout offer significantly above the recent share price. I sent a quick recommendation to subscribers that it was time to sell and lock in profits.
It was very gratifying to see my inbox fill up with thank you notes telling me how much money they made on this particular stock. Returns ranged from 42% to 63%, depending on when they originally bought the stock.
The stock is Aircastle Ltd (AYR), a mid-cap, global aircraft leasing company. The stock has been on and off the Dividend Hunter list a few times. The company is a tremendous cash flow generator, and the dividend grew by 6% to 7% every year.
However, the share price would swing from undervalued (time to buy) to overvalued (when I would say “Sell”), and back to undervalued.
My most recent round of adding AYR to the recommendations list was on May 1st, when the stock was at $20 per share, and the yield was up to 6%. The buyout will be at $32 per share, producing a very nice 63% total return since many of my readers followed the buy recommendation and jumped into Aircastle.
On the buyout news, the AYR share price jumped up above the $32 offer, and I sent out the sell now email.
I did not recommend adding Aircastle six months ago with the expectation of a big capital gain due to a buyout offer. I did know the stock was undervalued and likely to move back up into the mid-$20s.
AYR was a Dividend Hunter stock because it paid an attractive dividend yield, could be counted on for nice annual dividend increases, and the Aircastle business threw off huge amounts of cash flow. The company is generating $5.00 plus per share annual free cash flow. When the stock was at $20, that meant a 25% cash flow yield.
There are investment funds and companies in the world that understand that while we operate in a stock market system where all of the news and investor focus is trying to find the next hot thing, buying businesses that generate large amounts of free cash flow give a better probability of paying off in the long run. These big-money investors see the value in cash flow like Aircastle produces.
I personally like to recommend and invest in companies that generate a high level of cash flow, out of which they pay attractive dividends. This is a path for long term investment success without trying to guess and time the stock market direction.
I don’t expect my stock recommendations to all get buyout offers, but I am not surprised when the occasional one happens, and we get a nice capital gain bonus in addition to the solid dividend income we’ve been earning along the way.
I don’t know which stock will be the next to get a buyout offer, but I know you want something juicy to consider. OK, take a look at EnLink Midstream LLC (ENLC).
This energy midstream company has dropped to the point which to use the technical phrase is “stupidly cheap.” A private equity company already owns a portion of ENLC, and I wouldn’t be surprised to see a buyout offer show up at 20% to 25% higher than the current value.