CDI Weekly Digest 93

Dividend News

We have two dividend increases this week! This is not a drill!

• Alaris Equity Partners (TSX:AD.un) increased its quarterly distribution by 9% to $0.37 per share. Yield is 7.9%, payout ratio is approximately 60%

• Waste Connections (TSX:WCN) increased its quarterly dividend by 11.1% to US$0.35 per share. Yield is 0.8%, payout ratio is approximately 50%

We had no dividend decreases this week.

Interestingly, Waste Connections is trading at a 52-week low and despite the stock trading at what looks like an elevated 32x forward earnings, that P/E is actually a little cheaper than the five-year average valuation.

It’s a little rich for my blood, but I know some of y’all might be interested. Especially near a 52-week low.

Anyway, let’s start things off with why Alaris increased its dividend.

Alaris puts cash to work

Alaris Equity Partners finally announced it put some cash to work this week, which caused a nice little 2.5% pop in the stock. At one point shares were up more than 4%, but settled down as the day went on.

The total investment is worth US$52.7M, with a little more than half going towards McCoy Roofing. McCoy is one of the leading roofing and storm restoration service providers in the Midwest. Alaris invested a total of US$27M into McCoy, with US$19M going towards a preferred share yielding 14% and US$8M going into common equity. Common shares have more upside, but don’t deliver any income today.

Alaris and McCoy also plan to increase the total investment by US$32M if McCoy can achieve certain growth and profitability targets.

In addition to the McCoy investment, Alaris also increased its stake in Cresa LLC and Carey Electric Contracting.

The new investment in Cresa is worth US$20.5M, which brings the total investment in the commercial real estate advisory firm up to the US$50M range. Alaris will get a US$7.1M annual distribution on its investment, good enough for a yield of around 14%.

The Carey Electric investment is smaller, worth US$5.2M. That’s on top of the US$10.3M it has already put to work in the company. Carey’s annualized distribution back to Alaris has increased by 16% from US$1.9M to US$2.2M.

Obviously, these deals are a positive for the stock. The big criticism of Alaris is the company continually needs to put capital to work, since the structure of the deals assures the most successful companies will eventually buy Alaris out. The stragglers, meanwhile, won’t be able to afford to. So you have a situation where the good deals have capped upside while the bad ones linger.

Still, I don’t think that’s really such a bad outcome. Alaris makes money on the good deals, with companies often paying a handsome premium to buy out their preferred shares. Sure, they’d like it if they stuck around longer, but it’s still not such a bad outcome.

From our perspective, the good news is what these new investments will do for our distribution payout ratio. Even if we include the 9% raise, the payout ratio is right around 60%. It also implies that cash flow will be in the $2.30 per share range, which translates into a great valuation for the stock. As I type this, Alaris shares trade hands at $18.85 each, putting the stock at just over 8x forward cash flow.

The stock is cheap, and I think it’s still a nice buy today.

BCE investor day

BCE had its investor day last week, and management outlined what I thought was a pretty reasonable plan. There’s just one problem.

Firstly, the company is committed to increasing free cash flow per share, although the process is going to take a little while. Essentially, the plan consists of:

• Driving execution upside

• Making the company more efficient

• Strengthening the balance sheet

• And decreasing the cost of capital

Ultimately, this translates into slower growth in the 2-3% range annually on the top line, but with FCF growth driven by cost improvements and decreased capex. The target is 15% FCF growth annually through 2028, which the market likely views as a little bit ambitious.

We also got additional colour on the Ziply deal. As it stands today, some 1.4M Ziply customers have the ability to connect to fibre internet. The plan is to increase that to 3M by 2028, with some 40% of customers subscribing to fibre services. This compares to 25% currently. It also plans to grow revenue by 15-20% annually through 2028, and grow adjusted EBITDA by 14-18% through the same period.

While the growth is definitely impressive, I’m still a little worried about how much Ziply is going to cost. The company has been clear that it expects total free cash flow to go up — which implies that the Ziply upgrade to fibre won’t cost that much — but it still isn’t giving much in ways of projections there. This makes analysts nervous, including me.

Ultimately, I think this. BCE has a bloat problem, and needs to cut costs. It also has a debt problem, and needs to get that under control. I like its commitment to the bloat problem, and believe there’s a sustainable plan there.

But its debt commitment was a little short on details. Sure, there’s a target there (debt down to 3.5x EBITDA by the end of 2027), but that’s really all we got. And even if the company can achieve that while having to pay for the Ziply rollout, that’s still not a great balance sheet compared to say the likes of Quebecor, which is already at that 3.5x EBITDA debt target.

I can see why the stock sold off after this event. I I think overall the plan is reasonable and the company is saying the right things, I’m just not sure how it’s going to execute the debt payoff part while also paying for the Ziply capex.

Rogers stock and the Blue Jays success

Someone asked me this week if the Blue Jays success in the playoffs makes Rogers Communications (TSX:RCI.B) shares a buy.

I wouldn’t base my investment decisions on one playoff run, even though it has been 40 different kinds of awesome. I still think Rogers has too much debt and I don’t love their sell-a-portion-of-the-towers plan to pay it off, so I’m not really a fan from that perspective.

However, this does give me another opportunity to talk about the likely upcoming Rogers sports team spin. The expectation is Rogers will buy the remaining 25% of MLSE it doesn’t own from the Tannenbaum family and package it up with the Blue Jays as a Canadian sports team publicly traded company.

If we look at other publicly traded sports franchises we usually see a combination of:

• Super high valuations

• Basically zero earnings (sometimes even losses)

• Yet steadily climbing share prices as various entities say franchises are worth more

  • Or sales of comparable franchises keep going higher

I’m not super interested in such investments because they’re poor choices for those of us who insist on dividends. There’s certainly a bull case for owning sports franchises, I just choose not to. They’re not what I’m looking for.

However, such an event will have an advantage for those of us who like the telecom side of the business. Sports franchises don’t have a whole lot of cash flow, but the rest of Rogers’ business does. By spinning off the sports franchises into their own entity, that creates a telecom entity that has the ability to generate tons of cash. That would be the part of Rogers I’d be interested in.

Or you can just buy Quebecor today, which looks an awful lot like what the new Rogers will look like — and without any of the execution risks. Geez, I just keep coming back to Quebecor, don’t I?

Nelly’s new buys

I put most of the proceeds from the Franco-Nevada sale to work this week, adding to two positions I like a lot today.

The first is Coca-Cola FEMSA (NYSE:KOF), which I think is one of those quietly good companies that trades at a reasonable price. KOF is the dominant Coca-Cola bottler in much of Central and South America, which is a pretty solid business. Returns on capital and equity are strong, the balance sheet is great, and Coca-Cola dominates the market in LATAM.

Plus, the company has spent some money on capex in the last few years, investments that will pay off in a couple of ways for shareholders. These investments will likely increase revenue, of course, but since capex needs in the next few years shouldn’t be as high, the company is in the position to start paying out special dividends and/or do share buybacks. Since something like 75% of shares are owned by both FEMSA and Coca-Coca, I’m not sure the share buyback is really the best choice here. So I expect special dividends, which I think will attract some folks to the stock and increase the price. And if they don’t, they’re still extra cash in my pocket.

KOF is up to about 1.4% of my portfolio.

The larger buy was North West Company (TSX:NWC), the owner and operator of grocery stores in the remote part of Canada. It also has stores in Alaska, the Caribbean, and South Pacific.

Shares are currently flirting with a 52-week low because investors expect cuts in Canadian government services, which could lead to less government money offered to First Nations who live in the Arctic. Less government money would result in decreased spending at North West stores — or so goes the logic, anyway.

There were also fires up north this summer that caused the evacuation of certain communities, which temporarily hit the bottom line.

This could be an issue in the short-term, but in the long-term Canada wants to encourage settlement (and military build-up) in the Arctic. There are various schemes to entice folks to live and work up there, and the region is rich in various natural resources. Having a strong north region is important to Canada’s sovereignty. The last thing we as a nation want is to have the Russians cross over and start claiming land as theirs.

North West operates in communities where it is the only player in town. These places are small and remote enough that no competitor will ever usurp them. That’s a pretty solid moat, at least in my books.

It’s also a logistical challenge to get food up north, and citizens there pay the price. While it’s not great for consumers, it’s excellent for the company that runs the store. Margins are better than any other grocery store in Canada, and Amazon isn’t really an option. It no longer subsidizes shipping rates to the Arctic.

I not only like the business, but I also like the valuation. The company is projected to earn around $4 per share in fiscal 2026 (that starts in February), which puts us at around 13x forward earnings. I think that’s cheap for such a quality company, and that valuation should be closer to the 15-18x earnings range. Even if we don’t get multiple expansion, the company should be able to grow earnings by extracting a little more out of each store. Shares could trade at 13x earnings, grow earnings by 5-6% annually, pay out a nearly 4% dividend, and the result would be just fine.

I bought this one in the summer of 2023 for around $30 per share, or right around 10x earnings. I thought it was a screaming buy back then and should’ve bought more, but I just didn’t have the cash. So the position was a relatively small 0.3% of the portfolio. It’s much bigger now, with a weighting of close to 0.9%.

Your author has positions in various stocks mentioned. You can view his portfolio here. Nothing written above is investment advice. It is for research and educational purposes only. Consult a qualified financial advisor before making any investment decisions.