If you took an all-American road trip this summer, you surely came across more than low gas prices and new electric-vehicle charging ports. You undoubtedly encountered relentless traffic. The total number of miles driven in the U.S. is on pace to reach a record in 2016, up 3.3% compared with last year. This trend follows several years of unchanged or decreased traffic growth.
Depending on your route, you probably also railed at ubiquitous tolls. It can cost $13.85 to traverse the New Jersey Turnpike, $40-plus to cross Pennsylvania on its Turnpike and $9.83 to zip from San Antonio to Austin on the privately operated Texas Route 130. (I took the Texas trip last year, and the thrill of driving at 85 miles per hour—the legal speed limit—made the price worth it.) And if you’re crazy enough to drive into Manhattan from New Jersey, you’ll pay as much as $15 to use one of the tunnels or the George Washington Bridge.
What does this have to do with investing for income? A lot. Drivers’ wallets support one of the best-performing and most secure municipal bond sectors: toll-road revenue debt. It’s a compelling story. Even before this year’s acceleration in miles driven, public toll authority revenue was already demonstrating steady growth. State and regional highway agencies publish periodic financial reports, to little fanfare. If these agencies were publicly traded companies, I’d wager that their stocks would be sizzling alongside those of utilities and real estate investment trusts.
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In truth, tollways aren’t all that different from REITs and utilities. Highway authorities control the land, constantly borrow for expansion and maintenance, and collect regular and predictable rents (your tolls). They can raise prices with impunity because travelers and commuters rarely have a plausible alternative.
Thus, revenue in 2015 for the Illinois State Toll Highway Authority was 18.3% greater than in 2014. In the first half of 2016, the North Texas Tollway Authority, which serves the Dallas region, reported both a 17.4% revenue increase and a 6.7% increase in “vehicle transactions” (the count of paying cars and trucks) compared with the same period a year earlier. Even though Maryland cut some toll rates in 2015, its Toll Facilities Authority receipts still grew by 5.6%.
All of this thrills bondholders. Standard & Poor’s toll-bond index, which includes 1,800 bonds with an average maturity of 18 years, returned 9.5% over the past year through August 31 and 9.4% annualized over the past three. By comparison, S&P’s broad revenue bond index returned 8.0% over the past year and 7.7% annualized for three years. And, of course, the interest component of these returns is free of federal income taxes.
Rock solid
Most toll bonds are rated in the double-A tier. A few are triple-A, and a handful occupy the single-A range. But as a rule, the ratings are moot because the bond covenants require the operating agencies to hike tolls if “coverage,” the buffer between revenues and interest obligations, falls anywhere near a specified minimum. That won’t happen unless traffic vanishes. Until and unless drones deliver groceries and we fly to work like George Jetson, these bonds are ironclad.
The sector lends itself to individual issues, and brokerage listings are full of them. There aren’t any dedicated highway-bond funds. The closest is Deutsche X-trackers Infrastructure Revenue Bond ETF (symbol RVNU, price $28, yield 2.9%, one-year total return, 13.5%). It has about 20% of its assets in toll-road bonds, including issues from California, Florida, New York and Texas. Dreyfus Municipal Bond Infrastructure (DMB, $14, 5.4%, 27.9%), a closed-end fund that borrows money to boost returns, also holds some toll-road bonds. As of August 31, the fund’s share price was 5.3% below its net asset value.
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