Gordon Pape: This high-yield stock should intrigue income-oriented investors
ECI.TSX
Finding good quality stocks with an above-average yield has become a challenge for income-oriented investors. Here's one that's worth looking at. Prices are as of the close on March 29.
EnerCare Inc.
Type: Common stock
Trading symbol: ECI
Exchanges: TSX
Current price: $15.65
Annual payout: 84 cents
Yield: 5.4 per cent
Risk Rating: Moderate risk
Website: www.enercare.ca
The business: Toronto-based Enercare is one of Canada's largest home and commercial services and energy solutions companies with approximately 1,000 employees and about 1.2 million customers. The company rents water heaters, furnaces, air conditioners and other products. It also offers plumbing services, protection plans, and related services.
Enercare is also the largest non-utility sub-meter provider, with electricity, water, thermal, and gas metering contracts for condominium and apartment suites in Ontario, Alberta, and elsewhere in Canada. Its Triacta is division a premier designer and manufacturer of advanced sub-meters and sub-metering solutions.
Why I like it: Renting home comfort products is not a glamourous business but it is steady and cash flow dependable. The stock is not particularly volatile, trading in a range of $13 to $16 over the past year. The annual dividend of 84 cents provides an attractive yield of 5.4 per cent at the current price.
Financial highlights: The company reported strong fourth-quarter and year-end results on March 7. Revenue for the quarter was up 12 per cent year-over-year to $141.6-million. Net earnings came in at $13.7-million (15 cents per share) compared to $5.7-million (7 cents per share) in the same period of 2014.
For the full year, revenue increased 55 per cent to $563.8-million, from $362.8-million in 2014. Net earnings were $51-million (56 cents per share), up from $22.3-million (34 cents per share) the year before.
Much of the improvement in revenue and profits can be attributed to the company's 2014 purchase of Direct Energy's Ontario home and small commercial services (OHMS) business for $550-million. Enercare says the deal was "transformative" for its business, giving it direct access to its customers, control over all aspects of its operations, and larger financial scale.
CEO John Macdonald described the results as "fantastic", not a word often seen in financial reports. He added: "Home Services dramatically grew its business while successfully managing the sizable integration of the acquisition from Direct Energy. Sub-metering, which continued to expand and achieve scale, achieved positive free cash flow and nearly doubled EBITDA."
Recent developments: On the same day the results were released, Enercare announced it is acquiring SEHAC Holdings Corporation, commonly known as Service Experts, for $340.75-million (U.S.). Enercare said the deal will give the company a strong presence in the U.S. and will be 25-per-cent accretive to 2016 normalized pro forma distributable cash flow.
SEHAC is headquartered in Dallas and operates in 29 states and three Canadian provinces. Had the company been a part of Enercare in 2015, corporate revenue would have almost doubled.
"Through Service Experts, we become a North American market leader in home services," said Mr. Macdonald. "The acquisition, which is a natural extension to our business, creates an opportunity to drive growth and create shareholder value."
The deal is expected to close in the second quarter.
Risks: There has been some erosion of rental unit customers, however it is not a serious trend at this stage. A more significant risk is the fact this is an interest-sensitive security. The company is carrying about $741-million in long-term debt, up from $692-million at the end of 2014. Any increase in interest rates would increase carrying costs as debt securities mature and would put downward pressure on the market price.
Distribution policy: The shares pay a monthly dividend of 7 cents (84 cents per year) to yield 5.4 per cent at the current price. The company has not announced a dividend increase for this year.
Tax implications: The payments are eligible for the dividend tax credit if held in a non-registered Canadian account.
Who it's for: This stock is suitable investors seeking above average yield, with a moderate degree of risk. I don't expect the share price to move significantly higher in the near future.
How to buy: The stock trades actively on the TSX with daily volume usually in excess of 100,000 shares, so you should have no trouble being filled. U.S. investors who buy through the Pink Sheets should place a limit order since daily volume is only about 2,400.Consult your financial adviser to see if this stock is suitable for your account.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. Follow him on twitter @GPUpdates and on Facebook.
Wed, 30 Mar 2016 12:33 EDT