Willis Lease Finance: A Triple Catalyst Play for 2025 Growth and Income

Willis Lease Finance Corporation (NASDAQ: WLFC) stands at a strategic inflection point, with three interconnected catalysts poised to drive its valuation higher in 2025: its inclusion in the Russell Small Cap Comp Growth Index, progress on its sustainable aviation fuel (SAF) initiatives, and disciplined dividend growth. These factors create a compelling case for investors to consider a long position, especially as passive fund inflows from its index inclusion begin to flow into the stock.

The Russell Reconstitution Catalyst: Passive Inflows and Technical Momentum
WLFC's addition to the Russell Small Cap Comp Growth Index—effective June 30, 2025—marks a critical milestone. The reconstitution, which occurs annually, forces passive funds tracking the index to rebalance their portfolios, creating a $220 billion+ trading window for small-cap stocks like WLFC. Historical precedent suggests this process can lift a stock's price by 5–15% in the weeks following the rebalance, as funds rush to comply with indexing requirements.

The timing is fortuitous. WLFC's inclusion announcement in May 2024 has already spurred early buying, but the final rebalancing on June 30 will likely intensify this momentum. The stock's liquidity, though small-cap, is sufficient to absorb the inflows without excessive volatility, as evidenced by its average daily trading volume of ~400k shares.

Operational Momentum: SAF Projects as a Growth Engine
While passive inflows provide short-term tailwinds, WLFC's long-term thesis hinges on its $1.5 billion SAF project in the UK, slated to begin production by 2028. The facility will produce 750,000 metric tons of SAF annually, leveraging government grants and partnerships with industry leaders like BP and Rolls-Royce. Crucially, the project aligns with the EU's mandate to blend 2% SAF into aviation fuel by 2025, rising to 5% by 2030—a regulatory tailwind that ensures demand growth.

The SAF venture offers two key advantages:
1. Diversification: Reduces reliance on traditional aircraft-leasing revenue, which now accounts for ~80% of sales.
2. Scalability: WLFC's “Carbonshift” licensing pathway allows it to franchise SAF production technology, unlocking recurring revenue streams.

Financially, the project is underpinned by $500 million in government grants and a 15-year supply agreement with a major European airline, reducing execution risk. Over the next decade, SAF could contribute $200–300 million annually to WLFC's bottom line, a material uplift from its current $150 million pre-tax income.

Dividend Discipline: Income with Growth
WLFC's dividend policy adds further appeal. The company initiated a $0.15 quarterly dividend in Q1 2025, yielding ~2% at current prices—a premium to the Russell 2000's average yield of 1.2%. This payout is sustainable, given its $2.87 billion lease portfolio (up 18% YoY) and a conservative debt-to-equity ratio of 1.2x. Management has signaled a commitment to growing the dividend by 5–7% annually, even as it invests in SAF.

Risk Factors and the Bull Case
Risks remain. The SAF project's timeline hinges on regulatory approvals and construction delays, while the Russell inclusion is not guaranteed beyond 2025. However, WLFC's 22% revenue growth in 2024 and strong lease renewal rates (95% in H1 2025) suggest it can maintain the metrics required to stay in the index.

The bull case assumes:
- Short-term: A 12–15% pop in WLFC's stock price by August 2025 as passive funds complete rebalancing.
- Medium-term: SAF projects begin contributing to margins by 2027, lifting EBITDA by $50 million annually.
- Long-term: Dividend growth and SAF scalability justify a valuation multiple expansion from 10x to 12x forward earnings.

Investment Recommendation
With a current price of $28.50, we recommend a buy rating with a 12-month price target of $35 (23% upside). The confluence of passive inflows, SAF-driven growth, and dividend income creates a multi-year story. Investors should consider a phased entry, accumulating shares in the $27–$30 range ahead of the June rebalancing.

Final Note: For risk-averse investors, pairing a 5% position in WLFC with a Russell 2000 index ETF (e.g., IWM) can balance pure-play exposure with broad-market diversification.

Data as of June 19, 2025. Past performance is not indicative of future results.