The surging price of New York's taxi medallions and their promise of steady cash flow have sparked investor interest in the licenses and bolstered shares of a company that finances their purchase to a four-year high
The surging price of New York's taxi medallions and their promise of steady cash flow have sparked investor interest in the licenses and bolstered shares of a company that finances their purchase to a four-year high.
Investors are pooling funds to buy the six-inch-wide aluminum disks that are affixed to the hoods of cabs after two of them sold for a record $1 million each last month, said Andrew Murstein, president of Medallion Financial Corp.
Shares of the firm have climbed about 17% since the Oct. 19 sale, compared with a 6.4% gain for the Russell 2000 Financial Services Index.
“A lot of people have been loading up recently on medallions because they think it's a safe asset,” Mr. Murstein said.
The company owns about 300 medallions and plans to buy “several hundred more” in New York and other cities, he said.
“These are little cash cows, constantly taking in fares and spitting out money to the owners,” Mr. Murstein said.
A regulated supply has helped taxi permits outgain equities, oil and gold for the past two decades.
With New York City unemployment at about 9% for more than a year, there are more drivers willing to fill shifts and pay garages to drive cabs, giving medallion owners a profit of about $2,500 a month, said Simon Greenbaum, a broker at NYC Medallion Brokers Inc.
That is about a 3% return for a $1 million medallion.
Compare that with the 2.16% effective yield on U.S. triple-A-rated corporate bonds, down 75 basis points this year, according to a Bank of America Merrill Lynch index. Yields on 10-year Treasuries have dropped 126 basis points this year to about 2.03%.
GREAT INVESTOR INTEREST
Nat Goldbetter, who brokered the sale of the two $1 million medallions, said he fielded about 15 calls in October — 50% more than usual — from investors not involved in the taxi industry but looking to put money into medallions.
Medallion Financial, which is listed on Nasdaq under the ticker symbol TAXI, boosted its dividend this month for the fourth time this year as third-quarter profit at Medallion Bank climbed 43% to $4.58 million, the company said in a Nov. 2 statement. The shares topped $12 early this month.
The firm charges interest of about 6% to borrowers purchasing medallions and also earns income from leasing its own licenses, Mr. Murstein said.
Each New York medallion reaps about $40,000 a year in profit, he said.
“Next week alone, I have seven meetings” with potential new investors, Mr. Murstein wrote in an e-mail.
Medallion Financial shares offer “a pretty nice yield in a low-interest-rate environment right now,” said Justin Akin, a fund manager at River Road Asset Management LLC, which oversees more than $5 billion and owns about 6% of the company.
“There is no other pure play” among companies profiting from medallions, he said.
The company's board includes Hall of Fame baseball player Hank Aaron, three-term New York Gov. Mario Cuomo and Lowell P. Weicker Jr., the former Connecticut governor and U.S. senator.
Medallions are divided into transferable individual permits that require owners to drive the vehicles at least part time, and corporate licenses, which may be leased full time. A bill pending in the New York state Legislature would boost the current 13,237 licenses by 1,500 starting in July.
There is still investment “upside” in New York because of potential fare increases that would spur demand and increase returns, Mr. Murstein said.
“People pay $1 million for a medallion because they're going to get that money back in a steady income stream,” said David Yassky, chairman of New York City's Taxi and Limousine Commission. “The return on the medallion investment is insulated from economic cycles a lot more than many other investments, because there are a limited number of medallions.”
In the year after Lehman Brothers Holdings Inc.'s collapse in September 2008, when the S&P 500 fell 12%, corporate medallion prices rose about 5%, according to commission data.
From 1990 through last month, the cost of corporate and individual medallions increased 637% and 440%, respectively, the data show. The S&P 500 was up 255% during that span, compared with increases of 115% for the MSCI World Index, 327% for crude oil and 330% for gold.
Most people who call to ask about buying licenses lose interest after hearing about the upfront costs, Mr. Goldbetter said.
Potential investors also may risk piling into a bubble spurred partly by fleet owners' borrowing against the rising value of the licenses they own to finance new purchases, he said.
“It's not for everybody,” Mr. Goldbetter said. “It's a good investment for the people in the industry, but to the outside investor, it's a crapshoot.”
