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Dividend Analysis - Saputo Inc (TSE:SAP)
Written on 13 May 2008 by average_joeLooking for a good Canadian dividend paying company? A good place to start looking is the S&P/TSX Canadian Dividend Aristocrats. Reader Luciano has been thinking of investing in a member of that list: Saputo Inc.
Let’s have a look and see if this company belongs in our portfolio of superior dividend yielding stocks!
Company Profile:
From Reuters:
Saputo Inc. is a dairy processor. The dairy products sector includes the production and distribution of cheeses and fluid milk, mainly in Canada, Argentina and the United States. The grocery products sector consists of the production and marketing of snack cakes, tarts and cereal bars. The Company’s dairy products sector includes Canadian and Other Dairy Products Sector and US Dairy Products Sector. Saputo’s dairy products are available in three segments of the food market: retail, foodservice and industrial.
Market capitalization is $5.40B.
Company Fundamentals:
As usual, let’s see how management has performed by looking at the return on invested capital (ROIC). Looking at the last 5 years, management has very consistently delivered an ROIC in the 12%-14% range. The 5 year average ROIC is 13.10%.
The return on equity (ROE) figures bear this out. The 10 year average ROE is 15.94% and the 5 year average ROE is 16.46%. The 5 year is slightly lower but incredibly consistent over that timeframe.
Equity growth rate has most definitely been trending ever downwards. The 9 year average equity growth rate is a very nice 16.13%. The 5 year rate drops to 11.16%. The 3 year rate sees a further drop to 9.58% and last year’s equity growth rate remained consistent at 9.75%. Still decent growth but the downward trend is not as appealing.
Earning per share growth rate shows a much steeper decline. In fact, in 2006, there was a decline of 11.93%! Even with that, that 9 year EPS growth rate comes in at 17.47%. The 5 year rate plummets to 6.88%. The 3 year rate gets decimated to 0.68%. But last year’s EPS growth rate came in at a healthy 16.15%! More investigation into what occurred in 2006 is definitely warranted here. Interestingly enough, the equity growth rate in 2006 came in at 7.02%. A little on the low side, but not completely out of character.
Sales growth rates have been on the decline from the 9 year rate of 16.12% down to the 5 year rate of 3.84%. The 3 year sales growth rate also came in at 3.84%. And last year’s rate showed a decrease of 0.53%. Sales growth rates declined in 2000, 2003 and 2007. But they have always seemed to rebound for a few years.
All in all, I am concerned with the downtrend in all the fundamental numbers. To me it implies that future dividend growth rates will follow suit. Let’s have a look at the dividend fundamentals.
Dividend Fundamentals:
The current dividend yield is 1.88%. That is considerably below the 2.51% dividend yield of the TSX Composite index. So I would consider this a below average dividend payer.
Now, the dividend growth rate over the last 10 years has been absolutely fantastic! Just over the last 5 years, the average dividend growth rate has been a whopping 28.44%! But, just like the fundamentals, the rate has been slipping. The 3 year rate slides down to 19.43%. And last year’s dividend growth rate comes in at 13.04%. Excellent growth rates all around, but the trend is disconcerting.
The dividend payout ratio has been consistently increasing from a mere 5.17% back in 1997 to the current 34.98%. Still a fairly conservative payout ratio with room to increase.
Cash flow growth rates mimic the EPS growth rates. In 2006, there was a decrease of 6.04%. So that of course brings down many of the averages. The 9 year rate is 15.79%. The 5 year rate plummets to 5.13%. The 3 year rate comes in at a mere 1.54%. But last year’s rate rebounded to a very healthy 12.63%.
Dividend growth rate is still solid (even if decreasing) and the payout ratio is fairly conservative.
Valuation Models:
Time to put a price on this company. Let’s use our 3 models to determine a fair price to pay for Saputo Inc.
The average high dividend yield model takes into account the dividend yields over the last 5 and 10 years. In this case, the 10 year average high dividend yield is 1.47% while the 5 year average high dividend yield is 2.05%. The current yield is sitting in between these two values at 1.88%. If I demand the 5 year average high dividend yield of 2.05%, then my model price works out to $23.40. At the current price of $25.59, I would have to pay a premium of 9.35% for this stock.
Benjamin Graham would not be as generous as me! The Graham number works out to $14.96 or a premium of 71.08% over the current price. Ouch.
Using the discounted present value model, I used the following inputs:
- future EPS growth rate of 11.16% (determined from the 5 year equity growth rate)
- future P/E of 16.38 (the 5 year average P/E)
- dividend yield of 2.05%
- future dividend growth rate of 13.04% (Although this is the lowest of the growth rates, it may be too high considering the declining fundamentals)
With this information, my model price works out to $21.94 (or a premium of 16.64%). Definitely more in line with the average high dividend yield model.
Here is my dividend analysis of SAP.
Here is the 1 year stock price chart:
Conclusion:
The stock has definitely been a dividend performer. The dividend growth rates have been amazing. However, with this great growth, the dividend yield itself has remained relatively low in comparison to other dividend yielding stocks. And that is fine, as long as you can continue to get this superior dividend growth.
However, I am concerned with the declining fundamentals which of course translate into lower dividend growth rates. Even with that, the dividend growth rate is still excellent.
All the model prices show that the stock is currently overpriced. I would definitely wait for a pullback and would be looking at around the $22 price range.
Would I consider this for inclusion in our portfolio of superior dividend yielding stocks? No. With the expectation of slowing dividend growth, I would want a higher dividend yield than is currently available.
Full Disclosure: I do not own shares in SAP.
Popularity: 31%
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Update: Bank of Montreal (TSE:BMO)
Written on 7 January 2008 by average_joeLet’s have a look at one of the current members in our portfolio of superior dividend yielding socks - Bank of Montreal which trades on the TSE and the NYSE under the symbol BMO.
We first looked at Bank of Montreal back on July 9th, 2007.
Back then, it was paying a juicy dividend of 3.94% which of course caught our eye.
Looking back at my 3 valuation techniques, I came up with the following model prices for BMO:
- Average high dividend yield model price of $74.18 (stock price required to earn the average high dividend yield of 3.67%)
- Graham number of $55.04
- Discounted present value model price of $56.96
So, when we analyzed this stock back then, the current price was $69.00. So one of the models had it as a buy, but the other two did not.
Well, times have changed. As of close on Friday, January 4th, the price of BMO was $55.27. And it is now sporting a dividend yield of 5.07%! As you can see, the current price is now in line with the both the Graham number and the discounted present value model prices. And the dividend yield well exceeds the average high dividend yields of the last 10 years.
Of course, the issue is whether or not this dividend is safe and what type of dividend growth we can expect in the future.
The President and CEO, William Downe, stated in the 2007 Annual Report that
“Our exposure to subprime is indirect and very limited, but all markets have been affected and will likely exhibit continuing uncertainty about price and liquidity going into the next year. “
Even if this is not the bottom, picking up BMO with a 5% dividend yield seems like a fairly safe bet.
Full Disclosure: I do own shares in BMO.
Popularity: 77%
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Welcome to 2008!
Written on 1 January 2008 by average_joeI would like to wish each and everyone of you a happy and prosperous New Year in 2008!
I plan to get back to blogging regularly and first off will be to have a look at the current list of members in our portfolio of superior dividend yielding stocks.
After that, we’ll continue the search for more members to increase our diversification.
I believe that 2008 will be a good year to pick up these strong dividend payers at a fair price.
Popularity: 65%
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Constituents of S&P/TSX Canadian Dividend Aristocrats
Written on 26 November 2007 by average_joeBack on October 16th, I first talked about the new S&P/TSX Canadian Dividend Aristocrats index that was started by Standard and Poors.
Back then, they only showed 10 of the members in that index. But now, all the constituents are available.
Here is the full list:
1,AGF.B, AGF Management Ltd B Nvtg
2,ACO.X, Atco Ltd I Nvtg
3,BMO, Bank of Montreal
4,BNS, Bank of Nova Scotia Halifax
5,BNE.UN, Bonterra Energy Income Trust
6,BPO, Brookfield Properties Corp
7,CNR, Canadian National Railways
8,CU, Canadian Utilities Ltd A Nvtg
9,CIX.UN, CI Financial Income Fund
10,EMP.A, Empire Co Ltd A Nvtg
11,ENB, Enbridge Inc
12,SIF.UN, Energy Savings Income Fund
13,ESI, Ensign Energy Services
14,FCR, First Capital Realty Inc
15,FTS, Fortis Inc
16,GWO, Great-West Lifeco Inc
17,HR.UN, H&R REIT
18,HCG, Home Capital Group Inc
19,IGM, IGM Financial Inc
20,IMO, Imperial Oil Ltd
21,IAG, Industrial Alliance Insurance
22,L, Loblaw Companies Ltd
23,MFC, Manulife Financial Corp
24,MRD, Melcor Developments Ltd
25,MRU.A, Metro Inc A
26,NA, National Bank of Canada
27,POW, Power Corp of Canada Subvtg
28,PWF, Power Financial Corp
29,REI.UN, RioCan Real Estate Invmt Trust
30,RY, Royal Bank of Canada
31,SAP, Saputo Inc
32,SLF, Sun Life Financial Serv Canada
33,TOC, Thomson Corp
34,TIH, Toromont Industries Ltd
35,TD, Toronto-Dominion Bank
I have looked at quite a few of these stocks. But we’ll definitely have to have a look at the rest of them!
Popularity: 98%
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