Dividends or no dividends? Often this debate can be seen in investing articles. Theoretically, a company can reinvest their profits into the business. If it’s a good business with a good leadership team, they should be able to grow that money faster than the shareholder could do otherwise.
That argument often breaks down in the face of reality, especially for companies that are dominant in their fields where they don’t receive a large return on new investment. It also breaks down for companies who make very poor decisions on expansion (like Barrick Gold) that end up in massive write-offs down the road. Sometimes these “growth” companies are bid up to extremely high P/E levels (like technology stocks), which means on a per-share basis, they are not actually re-investing that much money (nor, on the other hand, could they pay much in dividends. Valuation matters).
But it’s still a potentially valid concept, and I’m willing to consider companies that are priced at a discount.
Mainstreet Equity (MEQ.TO)
Enter Mainstreet Equity, TSX: MEQ, a Canadian real estate company. Mainstreet Equity buys undervalued properties, renovates them, adds value and reduces expenses to improve efficiency and rents them out. Profits are reinvested, not distributed. Because MEQ is still small, they have not run into some of the issues above with other non-dividend paying companies. And they’re certainly not overvalued – they trade at a low P/E and a 25% discount to book value despite great growth metrics. Look at some of the numbers below.
- Market Capitalization: $375 M
- Revenue: $78 M
- FFO: $19 M
- Net Earnings: $63 M
- P/E: 7.3
- P/FFO: 21
- P/B: 0.75
- Revenue Growth: 17%
- Net Earnings growth: 25%
- FFO Growth: 55% (20-25% after some adjustments)
- Shareholder Equity Growth: 14.5%
Despite the high growth, it has been done without significant share dilution. Shares outstanding, fully diluted, are only up 1% year over year.
I’ve been tracking MEQ on and off for the last couple of years. MEQ’s business model is very easy to understand. The stock price hasn’t done much at all, but in this case it looks like it has only made them that much better valued as you get two years of growth for free.
On a valuation basis, MEQ is a definite buy. The only metric that is expensive is the P/FFO. MEQ does receive a signficant portion of its net earnings from increases in fair value of the properties. Fair value gains are reasonable for MEQ, in my opinion, because they are reinvesting a lot of capital to improving properties. And FFO growth is well beyond what most REITs are able to produce, which is normally just due to rent increases over time.
MEQ’s competition for investor’s money are REITs which pay out most of their operating income in payments. MEQ seems to be a very reasonable alternative to this model based on their track record. I would consider them a buy at this level given the 25% discount to book value and solid growth. Being a relatively small real estate company, there is plenty of room for them to double or triple in size over the next five to ten years. Shares are liquid enough for individual investors to get into the name, although the bigger funds would have some difficulty acquiring a significant position (advantage: individual investor).
If you have any questions, feel free to comment or send an email to email@example.com.