Shares of Student Transportation (NASDAQ:STB) are trading near an all-time high, propped up by retail investors attracted by the feel-good story of investing in a company that provides school bus services to children. As a return on their investments, the company pays a monthly dividend with an optically attractive dividend yield of 8%. In reality, STB’s business and financial strategy benefits its bankers and management, and is not accretive to shareholders. STB’s financing scheme relies on raising increasing sums of capital from new shareholders and creditors to maintain its irrationally high dividend, which is akin to “taking money from Peter to pay Paul.” As a result, in the absence of new capital, we believe STB’s dividend would ultimately be cut, and its stock price would fall closer to our fair value target of $2.00 per share, or 70% below the current stock price.
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