Stock of the Month – August 2016

Good evening and welcome to the first Stock of the Month! So let’s go through this process from beginning to end.

Step 1 Go to the Stock Screener:

So I ran the TMX stock screener with the criteria listed below.

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Step 2: Adjust the Search Results:

Once I ran the search, I filtered the columns with the criteria below.

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Step 3: Sort the Results by Yield% and Pick a Stock

So with the list that came up, I took a look at the results and I decided this month to land on Extendicare. It makes sense that they would be a good candidate. They run long term care facilities in Canada and the demographics fit perfectly into this type of business. So let’s take this opportunity with Stock of the Month to look deeper into them.

Step 4: Dig up Some Facts

Company Info:

Stock Price:  $8.48

Dividend: $0.04/month ($0.48/year)

Yield = 5.67%

52 Week Hi/Low =$7.62/$9.95

Exhibit 1: Dividend Policy

I attached the company’s dividend policy below. It’s  a good sign that they’ve reduced their payout ratio from 76% to 67% as a percentage of the fund’s Adjusted Funds from Operations. This means that their ability to pay the dividend has increased since last year and the fact that it’s well under 100% means there is relatively low risk of them cutting the dividend.

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Exhibit 2: Dividend Cut

On May 2013, Extendicare did cut the dividend to 4 cents/share from 7 cents/share. They reference the challenging environment in the US. Although this is certainly a red flag, exhibit 1 shows that the existing dividend is sustainable with their current cash flows.

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Exhibit 3: Financial Information

For this analysis, we’ll look at the Adjusted Funds from Operations for the past 2 years. Whether it’s a 3 month time frame or a 6 month time frame, the company’s cash flows have increased substantially. Combine that with the fact that their cash flow from operations is more than enough to cover their existing dividend and I would say that the company is trending in the right direction. If they keep increasing their cash flow from operations, it wouldn’t be a stretch to see a dividend increase in the future. If there is interest, I can follow up on this 3-6 months from now.

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Exhibit 4: Decision to end its US operations

I mentioned above that they cut the dividend in 2013 due to their US operations. The paragraph here from the company’s latest quarterly statement shows that they are in the process of divesting the remaining part of the US operation (VCPI), leaving it only with a Captive insurance company which is an insurance company owned by Extendicare to insure their own professional liability up until the close of their transaction. With this news, the company can focus their entire efforts on their Canadian business which they are growing as shown in their AFFO statement.

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Conclusion: Is this stock worth buying? Based on the information I posted above I would say yes it is worth buying. In 2013, they had their trouble with their US operations that led to a dividend cut, but they’ve divested themselves of that, and have grown their cash flows from operations materially to the point that their payout ratio is only 67%. At a yield of 5.6%, it certainly pays better than high interest savings accounts. The demographic trends are also quite favorable to the industry that they operate in. Therefore I would recommend taking a position in Extendicare as a long term holding in any dividend/income based portfolio.

Bottom Line: Thank you to everyone who took the time to read this long post. As always, please feel free to leave me feedback in the comment section below, email at options2riches@gmail.com, or on Twitter @Options2Riches. If you have any stock that you’d like me to look at, don’t hesitate to let me know and maybe it will be featured as September’s Stock of the Month.

Have a Great Evening!

Options2Riches


 

Disclosure: I don’t own a position in Extendicare, all the ideas presented here are strictly my own opinion. Please evaluate your own tolerance for risk before making any investment decision.

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