J.B. Hunt Transport Services (JBHT - Analyst Report) has increased its quarterly dividend to 15 cents from 14 cents paid in November 2012. The company declares dividend hikes in February each year. However, this time the company announced the hike for 2013 earlier and expedited the payments in order to benefit from the lower prevailing tax rates.
The recent hike was made in order to benefit from the lower prevailing tax rates. Tax rates are expected to move up next year owing to government policies on fiscal cliff. Depending upon investors’ dividend, income tax rates can move as high as 43.5%. Therefore, early payment would be a relief for investors shielding their dividend incomes from high tax cuts to some extent.
In 2013, the company does not intend to pay a quarterly dividend until its board meeting in April.
Despite the ongoing upheaval in the truck market, J.B. Hunt continues to maintain its yearly growth in shareholder returns. The company paid quarterly dividends of 11 cents, 12 cents and 13 cents per share in 2009, 2010 and 2011, respectively. For 2012, the company increased its quarterly dividend payment to 14 cents per share. Besides dividend payment, the company initiated a new share repurchase program of $500 million in 2011. As of September 30, 2012, the company had $503 million remaining in its share repurchase authorization under its two share buyback program initiated in 2010 and 2011.
We believe that the increase in returns to shareholders comes on the back of stronger freight demand, thanks to the company’s diversified business model and improving price mix.
The company is greatly benefiting from two of its major segments, Intermodal and Dedicated Contract Services (DCS), which contributed more than 80% to the total revenue in the third quarter of 2012.
The company expects double-digit intermodal volume growth over the near term as the intermodal market fundamentals strengthen relative to trucking. We believe the company will continue to see solid intermodal volume growth in its eastern network. Also, volume growth in the West will gain momentum as intermodal services continue to benefit from shippers converting freight from truck to rail.
Going further, we believe the company’s expansion of service offerings in countries like Mexico and pricing gains on contract maturities will provide a significant basis for Intermodal’s growth. The other segment, DCS is evolving into a highly specialized fleet with greater focus on final mile (i.e., residential) delivery, which is expected to achieve double-digit revenue growth in the long term.
However, higher operating cost with increased compensation expenses and third party driver cost continue to weigh on revenue growth. We believe significant growth in transportation cost stemming from tightening of capacity in the truck market amid truck load conversion to rail intermodal may affect the company’s performance ahead.
Further, the company faces intense competition from other truckload carriers such as YRC Worldwide Inc (YRCW - Snapshot Report) and Conway Inc. ()
Consequently, we are maintaining our long-term Neutral recommendation on J.B. Hunt, with a Zacks Rank of #3 (Hold).