Taxi Licenses Outperform Stocks, Oil and Gold

The surging price of New York’s taxi medallions and their promise of steady cash flows 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 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. (TAXI) Shares of the New York-based firm have climbed 17 percent since the Oct. 19 sale, compared with a 6.4 percent 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,” Murstein said in an interview last month. The New York-based 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.”

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 percent for over a year, more drivers will 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’s about a 3 percent return for a $1 million medallion.

Compare that with the 2.16 effective yield on U.S. AAA- rated corporate bonds, down 75 basis points, or three quarters of a percentage point, 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 percent.

Million-Dollar Medallions

Nat Goldbetter, 67, who brokered the sale of the two $1 million medallions, said he fielded about 15 calls in October -- 50 percent more than usual -- from investors not involved in the taxi industry looking to put money into medallions.

Medallion Financial, which is listed on the Nasdaq Stock Market under the ticker symbol TAXI, boosted its dividend last week for the fourth time this year as third-quarter profit at Medallion Bank climbed 43 percent to $4.58 million, the company said in a Nov. 2 statement. The shares climbed 1.8 percent last week to $11.74, the highest since 2007.

The firm charges interest of about 6 percent to borrowers purchasing medallions and also earns income from leasing its own licenses, 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, Murstein said in a Nov. 4 e-mail.

‘Pure Play’

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, in Louisville, Kentucky, which oversees more than $5 billion and owns about 6 percent of Medallion Financial. “There is no other pure play” among companies profiting from medallions, he said.

The company’s board includes former three-term New York Governor Mario Cuomo, 79, former U.S. Senator and Connecticut Governor Lowell P. Weicker Jr., 80, and Hall of Fame baseball player Hank Aaron, 77.

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 pool of 13,237 licenses by 1,500 starting in July.

Street Hails

Cuomo’s son Andrew Cuomo, the current governor, held a Nov. 4 summit to discuss the bill. It also would allow livery cabs to legally pick up street hails in the city’s outer boroughs and upper Manhattan, which New York City Mayor Michael Bloomberg said he supported in January. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

There’s still investment “upside” in New York because of potential fare increases that would spur demand and increase returns, 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 Standard & Poor’s 500 Index fell 12 percent, corporate medallion prices rose about 5 percent, according to New York City Taxi & Limousine Commission data.

From 1990 through last month, the cost of corporate and individual medallions increased 637 percent and 440 percent, respectively, the data show. The S&P 500 is up 255 percent in that span, compared with increases of 115 percent for the MSCI World Index, 327 percent for crude oil and 330 percent for gold.

‘It’s a Crapshoot’

Most people who call to ask about buying licenses lose interest after hearing about the upfront costs, 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 already own to finance new purchases, he said.

“It’s not for everybody,” Goldbetter said. “It’s a good investment for the people in the industry, but to the outside investor it’s a crapshoot.”

To contact the reporter on this story: Charles Mead in New York at cmead11@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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