Public transport is hardly the most exciting business, but it’s an essential one. What’s more, it’s unlikely it’ll ever disappear as a business model. There will always be a need for buses and trains and, as the world’s population grows, demand is only going to increase.
The biggest companies in the industry have a significant advantage. These operators have considerable economies of scale and, usually, good relationships with regulators.
This suggests companies such as National Express (LSE: NEX) and Go-Ahead (LSE: GOG), which currently dominate the sector, should continue to do so for many years to come.
Recent trading updates from National Express showcase the international travel company’s strengths. Over the summer period, from 1 July to the 30 September, overall group revenue increased by 14.5% and operating profit grew 14.3%.
During this period, the company signed several notable contracts. These include a €1bn, 700-bus contract in Casablanca for 15 years and 7.5-year contract renewal in Boston. This deal will nearly double National Express’s revenue in the Boston market to $420m.
These large, long term contracts give the company plenty of visibility over its growth and cash flows. This is good news for investors, particularly income investors.
At the time of writing, shares in the international transport group support a dividend yield of 3.7%. The payout is covered 2.1 times earnings per share, which suggests the company has plenty of headroom to both return cash to investors and spend more on improving its operations.
The distribution has grown at an average rate of 8.2% over the past six years. Since 2013, it’s up 50%. On top of this, National Express is dealing at a price-to-earnings (P/E) ratio of 12.6. That’s not too bad considering its growth potential over the long run.
As such, now might be the time to snap a share in this public transport operator if you are looking for income and capital growth over the long run.
Peer Go-Ahead offers a similar investment case. The stock is dealing at a P/E of 12.3 and supports a dividend yield of 5%. The payout is covered 1.6 times by earnings per share.
Like National Express, Go-Ahead has been using its experience operating public transport networks here in the UK to drive expansion overseas.
In December, the company started new contracts in Norway, Germany and Dublin. It already has a strong presence in the regional bus markets around the UK as well as in London. On top of these operations, Go-Ahead runs the GTR and Southeastern rail franchises. Internationally, it owns and operates rail contracts in Germany.
With travellers becoming increasingly concerned about their impact on the environment, Go-Ahead should see rising customer numbers. The same goes for National Express. Governments around the world are planning to spend more building out public transport networks to reduce private car ownership and air travel.
Go-Ahead, should be able to profit from this trend. By using its relations with regulators across Europe as well as economies of scale to bid for lucrative contracts.
Therefore, if you’re looking for a long-term income and growth investment, Go-Ahead could be worth your research time.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020