AL - Air Lease Corporation: Dividend Stock With Attractive Value Proposition

Summary

• Air Lease Corporation 2022 results were impacted by a Russian fleet write off.
• Current supply chain environment combined with high interest rates provides a solid investment opportunity in aircraft lessors.
• I believe there's a significant upside for Air Lease Corporation stock.
• The company is growing its dividends accordingly.

Air Lease Corporation ( AL ) has most definitely not been my favorite investment for investing in the aircraft leasing business. That honor goes to AerCap (AER), however I'm also bullish on Air Lease Corporation as the business can still scale up a lot and it does pay a dividend for those who are interested in some dividend income on the side. In this report, I will look at the Q4 2022 results for Air Lease Corporation, the share price development and update my price target for Air Lease Corporation stock.

Air Lease Corporation Stock Investment Pays Off After All

I wrote my first report on Air Lease Corporation in March 2021 and why I like to claim that all my picks return value and that has become a standard on the platform as well to only highlight winners and not losers. In almost two years, my bullish claim resulted in a total return of negative 1%. Yes, a loss, while the broader market gained 3%. When Air Lease Corporation prematurely claimed that there was no impairment risk related to assets on lease basis in Russia, I cut my rating to Hold as my data simply did not support the claim and I wasn't really impressed with how management handled the situation.

In May 2022, I turned bullish on Air Lease Corporation as it turned out that an impairment was required, and with management recognizing that reality I saw reason again to be bullish on the stock and since my last report in November 2022, shares had a total return of 16.3% compared to the broader markets being up less than one percent. I'm discussing the ratings here to show that while I want all my ratings to be right, that's not the case and some ratings do not quite pay off. That's a reality many authors are unwilling to discuss when making recommendations.

Air Lease Corporation Revenue Improves, Loss Widens

Year-over-year, revenues improved by 11%. Air Lease Corporation is enjoying some headwinds as well as tailwinds for its revenue. So, let's first look at what the tailwinds are. The tailwind is that due to supply chain constraints, the lease rates are developing positively for Air Lease Corporation. That's not so much reflected in the current revenues but for future revenues that should definitely help get better lease extension deals. With the delivery flow from original equipment manufacturers being constrained, that means the value of the aircraft already delivered and for instance owned by lessors is higher. This also means that as Air Lease Corporation is more open to sales of aircraft they can sell those aircraft at more attractive prices.

The headwinds also are related to the supply chain constraints. Because OEMs are not meeting their schedules, lessors are taking delivery of less aircraft than initially anticipated, and that is of course hurting the topline. Being able to take delivery of less new aircraft to generate revenues simply means the revenue generation is not as high as it could be in an unconstrained world. Apart from that we have the reduction of revenues from Russia which is around $18 million per quarter or around $60 million for the year.

What's interesting to note is that on a lower fleet count, Air Lease Corporation generated more revenues, which was driven with more normalized revenue recognition as COVID-19 related lease restructurings have tapered.

On the cost side, interest rates are increasing the cost of debt, but I wouldn't say that's a bad thing as those can basically be passed through on newer leases, and I would say a high interest rate environment makes leasing even more attractive. The only big cost item that was "off" was really the write off of Russian flight equipment. That stood at $802.4 million when initially recognized, and fetched with our data, but Air Lease Corporation was able to recover one Boeing 737 MAX which was added back to the company's flight equipment and subsequently the net charge for the year has been reduced. Adjusted net income is not yet where it was in December 2020, but it could have been were it not for the miss of revenues related to Russia. So, overall we do see the clouds of the pandemic dissolving but 2022 had some issues related to supply chain and Russia pushing the results but the results were still good given the circumstances I believe.

Air Lease Corporation Diversifying Away From China

What I actually found most interesting are questions and comments on geographical diversification regarding China. An analyst asked whether this was related to an effort to reduce risk due to the geopolitical tension between China and the US, and without admitting geopolitical risk might be a reason for that, Air Lease Corporation confirmed that the exposure measured against flight equipment value will fall below 10% this year. In 2022 just two out of 70 to 80 jets went to mainland China. Obviously, what plays a role are the lockdowns in China, strong demand in other regions and the fact that China has a big number of MAX airplanes that it could utilize if air travel demand necessitates. So, geopolitical risk is taken into account but it's also the overall demand profile that reduces the dependency on China. While I don't expect that we will see China taking aircraft from lessors in the same way Russia did it, it's good to see that exposure reduce.

What Is Air Lease Corporation Stock Worth?

Based on the price-to-book ratio for the past five years, Air Lease Corporation shares seem to be valued fairly. However, if we use the pre-pandemic numbers, which I think are more reflective of appetite in investment in the aircraft leasing business, there's 16% upside for Air Lease Corporation stock.

The average price target among Wall Street analysts provides a 30.2% upside from current price levels. So, I do feel comfortable with a projection of 16% upside based on the price-to-book value as I believe that's what shares should currently be trading at.

Air Lease Corporation Pays A Dividend

While I'm not necessarily looking for aircraft lessors to be paying a dividend, if you're interested in dividend income it might be worth noting that Air Lease Corporation pays a dividend. Its annualized dividend is $0.80 giving it a 1.9% yield. It's not a great yield, but we do note that dividends paid as well as the dividend yield have been on the rise for quite some time now. Even during the pandemic, the company maintained its dividend and even continued increasing it and I believe with the growth prospects that will continue being the case so you might very well end up with a very juicy yield on cost one day.

Conclusion: Air Lease Corporation Stock Is A Buy

Looking at the current business environment with high interest rates and supply chain constraints, I do believe that aircraft lessors such as Air Lease Corporation offer a very attractive value proposition. The company's asset base keeps rising when shocks as the one seen from Russia last year are excluded. The long-term growth drivers for Air Lease Corporation are there, namely continued growth in air travel demand. So, it's a good business to be in. It's relatively safe and I consider it a superior safe investment when compared to airlines. I believe that shares are currently 16% undervalued, and combined with a growing dividend, I do believe this offers an attractive long-term entry point to generate an attractive yield on cost.

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