Recessions Would Hurt Textainer’s Shipping

Textainer (TGH 2.34%) helps the world conduct business by buying and leasing out giant steel boxes. The company’s shipping containers are vital to getting products from where they are made to where they are used. That’s the positive view of the story, but investors looking at the stock following its recent 20% dividend increase should tread with caution. Here’s why.

Both simple and complex

It isn’t hard to understand what Textainer does. It buys shipping containers and then leases them to shipping lines so they can safely move products around the world. Textainer basically uses debt to buy the containers, so its profits are driven by the difference between its financing costs and the rates it charges shippers.

This is the basic model for all leasing companies, which is a very big business that spans from shipping containers all the way up to airplanes.

When things are going well, leasing businesses can make a lot of money. That’s pretty much what’s happening with Textainer right now. When the company reported its full-year 2022 results, CEO Olivier Ghesquiere summed the company’s year up by saying, “We are pleased to deliver a record profit for 2022, confirming an extraordinary performance across all our key business fundamentals.”

That’s what backed up the board’s decision to hike the dividend by a huge 20%. To put some numbers on that performance, revenue rose nearly 8% while earnings advanced roughly 13%. While the CEO hinted that 2023 would be a tougher year, he made sure to point out the strength of the underlying business:

Looking ahead, we expect stabilizing performance in 2023 as we continue to strategically assess the environment and invest only in opportunities in line with our long-term profitability objectives. Our core business model is durable and resilient, with contracted revenue and profits protected by our long-term lease contracts and fixed-rate financing policy.

But investors who look at the company’s history will probably be a lot less sanguine about the future than Ghesquiere.

What’s gone wrong before?

There are a lot of moving parts that all have to work together for Textainer to have a good year. For example, the lease rates it can charge are driven by the price of the containers it buys. Those prices are heavily dependent on the price of the steel used to make them. And that particular commodity can be quite volatile.

Meanwhile, the company signs multi-year contracts. If container prices have changed materially, and in the wrong direction, by the end of the contract Textainer may not be able to lease older boxes at the same rates it had previously achieved, reducing profitability.

Another key factor in performance is the company’s ability to sell its containers after it is done using them. That price, like lease rates, is highly dependent on current container prices. If Textainer can’t sell its old containers at desirable prices, its financial performance will suffer too.

Making things even more fraught with risk is that Textainer only has a small number of potential customers because the shipping industry is dominated by just a few companies. Roughly 90% of the company’s business is with just 20 customers. Should any of these customers face financial problems, it could have a material and negative impact on Textainer and, frankly, the entire shipping container business.

That isn’t idle conjecture, either — a major bankruptcy in 2016 upended the industry. And in 2019, Textainer had to deal with another customer bankruptcy although it wasn’t nearly as significant.

Tying all of this together, meanwhile, is global economic activity. Trade is driven by global growth, which drives commodity prices. Downturns, meanwhile, will depress demand for Textainer’s services, lead to lower container prices as commodity prices fall, and can push customers into bankruptcy.

When the business dynamics shift for the worse, they are highly likely to move in lockstep with each other. So when the business gets tough, there’s nowhere to hide — which helps explain the dividend cut in 2016. Note that it wasn’t until 2021 that the dividend was reinstated again.

Probably not the best option

If you are looking for a reliable dividend growth stock in the industrial space, Textainer’s history suggests that you should probably keep looking. It is highly sensitive to global economic cycles, and that increases the risk that the dividend growth on display in 2023 isn’t actually a sustainable figure over the long term. The next economic downturn, which some worry may come this year, could easily lead to a dividend cut, just like it did in 2016.