Dividend Updates – April 2014

Dividend news has definitely slowed down this month. I have three interesting dividend increases on my radar, and one dividend cut. I always like to analyze the circumstances around dividend cuts as much as dividend increases. Dividend cuts may not be the end of the company, but they certainly impact shareholder returns for a long time.

The Increases

Ticker Name Dividend Increase New Yield P/E Payout 1 Year Return
DOL.TO Dollarama 14.3% 0.7% 25 18.0% 22.7%
CSS.TO Contrans Group 20.0% 4.6% 15 69.3% 13.3%
AF.TO AlarmForce Industries 20.0% 1.1% 21 22.1% 11.9%

About The Increases

Dollarama (TSE: DOL) has been a top performing retail company over the last five years since it went public around $20 a share (it now trades close to $90). Dollarama is well on its way to becoming a future dividend achiever with three annual increases, averaging over 20% growth in the dividend per year. The dividend is still very low, however, at just 0.7%. If Dollarama can maintain 20% dividend growth for 10 years (which is very rare indeed), the yield on your invested capital today would still only be 4.3%. There could be substantial capital gains, but I think there is a lot of growth already built into the stock price. Dollarama will run into expansion problems in Canada and US expansion is unlikely (competition is extremely strong in this market). So, DOL is not for me at this price. Perhaps if the P/E was lower (definitely below 15, which is a stock price of $52, well below their 52 week low.

Contrans Group (TSE: CSS) is a truck freight transportation business. I own shares in Trimac Transportation (TSE: TMA), which is in a somewhat similar business. CSS has nearly doubled its dividend since 2008 and has a very healthy 4.6% yield. TMA is very close in numbers with a 4.5% yield, but has a lower payout ratio (~55%) due to its higher earnings per share. There hasn’t been a lot of growth with either of these companies, so it is good that investors are receiving a healthy dividend.

AlarmForce Industries (AF.TO) has now made its first appearance on my website. Most people in Canada are probably familiar with their advertisements on television. The stock isn’t cheap at a P/E of 20, but has done very well in the long run. The dividend was first initiated in 2012 and this is the first increase. The yield is quite low but it will be interesting to see if they can continue to increase their business.

Dividend Decrease

Ticker Name Dividend Cut New Yield Old Yield 1 Year Return
AET.UN Argent Energy Trust 77.1% 7.6% 22.4% -58.1%

Argent Energy Trust (TSE: AET.UN) cut its dividend two weeks ago. The company is an oil producer that is designed to pay out all of its cash flow in distributions. Because they only have US assets, they can do so in Canada without paying Canadian income taxes. However, unlike other energy trusts (like Parallel and Eagle), Argent intentionally decided to pay even more money out and try to grow through acquisitions. This strategy has failed and investors sold so much that the yield rose to as high as 22% before the cut was announced. Even with a 77% cut to the dividend, the yield today is still 7.6%. Is it a buying opportunity? The stock has been very volatile since the announcement and is down another 10% from the day after the announcement.

Assessing high dividend oil producers is not easy, and I admit to having some difficulty in doing so myself. I would recommend paying attention to the dividend and avoiding any company with yields above 6%. There is a high likelihood that you will lose capital on oil-producing stocks with yields much higher than that. The real risk is a commodity price shock – if oil prices fell 30% or more (which is entirely possible within any 5 year time period), dividends could be suspended and these companies could be left with high debt that they can’t service – meaning bankruptcy.

If you have any questions, feel free to comment or send an email to inbox@dividendblogger.com.

 

Mainstreet Equity (MEQ.TO): A Zero Dividend Real Estate Company

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.

Financials

  • 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

Growth Metrics

  • 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.

Overall Impressions

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.

Conclusions

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 inbox@dividendblogger.com.

Investing Thoughts – April 2014

April has arrived. Dividend increases have slowed down, although not unexpectedly – most of the annual reports are out. The next wave will probably start later this month and into May once Q1 results begin coming out.

The TSX has been doing very well this month – in fact, it hit a milestone on 2 April when it surpassed its 5 year high (previously post-crash high was March 2011) – the last time it closed higher was in 2008.

2008-09 seems like a long time ago? Every once in a while you should look at what the indexes did (or your portfolio at the time) to remind yourself what stocks can do in a bear market.

Gold has been pulling back since mid-March. The gold index is down about 13%. Financials and energy have been picking up the slack. You can pretty much track index returns to a tee with those three sectors.

Some of my stocks have been on a tear lately.

High Arctic Energy Services (HWO.TO)

HWO is on fire. I previously invested in them almost a year ago now at $2.48 and added to my position all the way down to $2.08 (and then added to my watch list at $2.03). What interested me was that they were very profitable, traded at a low P/E, had no debt (in fact, a solid net cash position), and were operating mostly in Papal New Guinea, which is at least five years ahead of places like Canada in terms of LNG – they have a major facility coming online this year, and multiple billion dollar integrated oil companies prospecting for natural gas and oil.

Well, HWO just announced a new 2 year contract with a big oil company (InterOil), which is a new customer for them, and are spending $50M on two heli-portable drilling rigs. One of the rigs will earn $30M/year for the next two years. To put this in perspective, they earned about $150M last year, so this is a 20% increase to revenues in one fell swoop, with the potential for another 20% increase if they contract out the second rig. They have enough cash on hand to cover about half the purchase and available credit for the rest – I’ll be checking the numbers but they will only need to borrow $25-30M at most and that will leave them still very low on debt.

HWO closed at $5.30 today after jumping 7% – I have a 125% return plus dividends over the last year on my 8000 shares. I wouldn’t be surprised to see a pullback but I don’t think it will be seeing $2-3 per share again.

Greenstar Agricultural Corporation (GRE.V)

GRE continues its expansion plans. Last year, they acquired a new tomato paste production plant. They also just announced they leased farmland to grow their own tomato pulp stock. These two deals could substantially increase their revenue in the next year. They are reporting results near the end of the month, which should be very interesting. They are also working on acquiring a Canadian distribution company to market their products directly in North America. I believe the stock has pulled back on the expectation of an equity raise to finance the acquisition – the last equity raise was $0.85.

Clarke Inc (CKI.TO)

Clarke is all out engaged in a proxy war with the board and CEO of Sherritt Corporation (S.TO). Sherrit is a $1.3 billion company, much larger than Clarke, but Clarke and their CEO do own over 5% of the shares. Apparently the board of Sherritt hardly owns any shares at all. I think Clarke has a good chance of winning. Clarke itself continues to trade at a substantial discount to book ($11.70+ book to $8.20 share price). Sherritt itself is up nearly 50% since February which could be forecasting good returns Clarke.

Autocanada (ACQ.TO)

The last time I mentioned Autocanada was on 20 March when they passed $50. It’s now 11 April, and they’ve been trading above $60 for the last ten days. ACQ has received the attention of a lot of institutions, and the market cap is now well over $1B which attracts larger funds. ACQ should be added to the S&P TSX Composite index within the next year. This is a big advantage for small investors – anyone could have gotten shares much earlier than the index, who will have to pay a premium to acquire shares. I’m not interested in selling mine, although most of the growth is priced in here and I don’t recommend anyone purchase until there is a major pullback (at least 20% below the high of $66, which means around $55).

If you have any questions, feel free to comment or send an email to inbox@dividendblogger.com.