Stella Jones: Stock & Dividend Analysis

I like today’s stock for a very special reason.

Stella Jones (TSX:SJ) is the kind of business we want around here. It does boring stuff, has good long-term growth potential, isn’t encumbered by much debt, and has a history of taking good care of its shareholders. It has also quietly become one of Canada’s better dividend growth stocks.

But never mind all that. Here’s the real reason why I like Stella Jones. Because the company is clearly named after some 1920s flapper girl who flouted all the rules. Her skirts showed off way too much leg, her bobbed hair was too short, and she had the audacity to not want to spend her entire life at home raising children. Hey, dying during childbirth was a real danger back then. That’s just good risk management.

So Stella gathers up her courage and heads to the bright lights of Hollywood. It starts off well enough. She gets “discovered”, which leads to steady work. She shows the studio they can depend on her. She takes direction well. Soon she gets offered larger parts and the much bigger cheques that come with the added exposure.

Her career is printing money, and she’s able to enjoy a special kind of freedom where she can afford whatever she wants. It starts small. First it’s a little bit of fun on the weekends. Then it’s the entire weekend. Alcohol loses its appeal; soon she graduates to more exotic substances. Inhibitions go out the window. The next thing you know she’s simultaneously sleeping with the lead actor, the director, and the head of the studio. Her personal life is a mess, she hasn’t filed taxes for four years, and she’s drunk a solid 80% of the time. It’s all going to come crashing down at some point, but until then…

Stella knows how to live, dammit.

What a person to name a company after.

Ed. note: Stella Jones was the result of a 1993 merger between the Stella SpA Company, an Italian timber and pole company and James Jones & Sons, a Scottish timber company. The two companies folded their North American assets into a new entity, which then started making acquisitions throughout the continent. But that story sucks, so by all means Nelly. Carry on. Please, tell us more about this person you clearly just invented.

Um… let’s not. Let’s take a closer look at the company in question.

I’m testing a new template this week. Around here we focus on:

So we’ll look at Stella Jones from each of those angles. But first, a little about the company.

Stella Jones today is a growth-by-acquisition company that operates mostly in the pressure treated wood sector. The company has three major divisions, including:

The company also sells timbers for things like railway bridges, marine pilings, and so on, as well as logs that get sold into the general timber market, but these are small parts of the business. So we’ll largely ignore them.

Utility products provides wood utility poles that have been treated to withstand the elements. Stella has been acquiring steel pole manufacturers of late, but this part of the company mostly sells wood poles to various utilities in North America. Utilities buy poles for two reasons — they’re either expanding, or they’re replacing worn out poles. Replacement revenue can be delayed, but you wait too long and poles start falling over.

It’s the same thesis for railway ties. There isn’t a whole lot of new rail being laid in North America these days, but there is roughly 170,000 track miles of rail in Canada and the United States that needs to be maintained. A wooden railway tie lasts anywhere from 5-30 years, depending on the conditions, how often the track is used, how heavy train loads are, etc. The good news for Stella is the move towards rail efficiency translates into ties wearing out a lot faster.

Stella is the North American leader in both railway ties and utility poles.

Stella also operates in the residential lumber market, using its facilities to treat lumber for outdoor residential use — used in things like decks and fences. The product is weather resistant so it lasts much longer in the elements than the alternative.

Stella has 46 different manufacturing facilities across North America. Most are located strategically near forests and near railroads, for easy shipping. Utility poles represent the majority of the business, while railway ties account for about a quarter of revenue. Residential lumber is 17% of revenue. The majority of the business is in the United States.

As mentioned, Stella is a growth-by-acquisition play. It has made more than 20 acquisitions in the last 20 years. The market went from being heavily fragmented to something much more consolidated. Stella and Koppers (NYSE:KOP) are the only two major players in railway ties. There’s some potential to acquire other players in utility poles, but the real growth potential is in steel and alternative infrastructure plays. This is highly fragmented and is a natural growth avenue. Stella understands the business and should be able to grow long-term here.

Stella Jones shares have done well over the long-term, but have struggled of late. In this section we’ll take a closer look at the company’s problems and try to judge whether they’re fixable or not.

A few things are impacting Stella Jones lately. The first is tariffs. The Trump administration is targeting Canada with tariffs, and in response, Canada has levied its own set of tariffs on various U.S. products. The lumber industry is a main target. Despite Stella telling the market that it really isn’t impacted very much by tariffs — very little of its product crosses the border — investors are selling first and asking questions later.

The exception is residential lumber. A decent chunk of that will cross the border. Stella is able to move production to accommodate, but it’s still an issue.

Something else impacting the residential side of the business is higher interest rates. If an American homeowner has to borrow at 7%+ to get the money to build a deck, suddenly they might not be very interested.

High energy costs also impact the company. Trucks move logs from the forest to Stella’s various processing facilities. These trucks run on diesel. The company released Q2 numbers recently, and EBITDA margins dropped to 16%. That number was 18.9% in 2025, and was 17.2% as recently as Q1. Diesel is the big culprit here, and things don’t look to be getting better anytime soon.

The railway tie business is also struggling a bit. Tie sales were $890M in 2024, then dropped to $821M in 2025. The number looks to be about the same in 2026, despite price increases. A few things are going on here, including:

In 2024, railway ties were 26% of the business. These days they’re 23% of the business. Utility poles, meanwhile, have increased from 49% of the business to 56% of the business. They’re doing well and making up for some of the railway tie losses, but not enough.

Stella has an interesting history of growing the bottom line. While overall growth is generally pretty good, it’s been inconsistent. Earnings will grow, then stagnate a while, and then grow again.

In 2016, the company earned $2.22 per share. The bottom line dipped in both 2017 and 2018 before resuming growth again in 2019. The same thing happened in the 2023-25 period, although it appears that growth will happen again in 2027, rather than this year.

Stella earned $2.22 per share in 2016, and then $5.75 per share in 2025. That works out to right around a 10% annual growth rate, which I’ll gladly take. Even if it is a little bit lumpy.

Analysts project the company will earn $5.32 per share this year, $6.11 per share next year, and then $6.70 per share in 2028. So that maintains a 10%+ earnings growth profile, although that comes from a poor 2026.

Can Stella maintain 10% growth over the next decade? That question is trickier to answer, but I believe it can. A combination of the following factors should get it there

I am a little bit concerned about the railway tie business going forward. It is possible other rails move some of their production in house, although I don’t think it’s terribly likely. You need a certain amount of volume to do so, and it isn’t like Stella takes a huge margin here. It’s a lot of capital to tie up and I’m not sure the returns would be there.

On the surface, Stella’s balance sheet does look a little elevated. It currently has a debt-to-EBITDA ratio of about 2.5x. That’s also on the higher end of its internal range.

Stella disagrees with my assessment. It tells investors it has plenty of available liquidity, and that the balance sheet supports any acquisition opportunities.

We can also see that the company has operated at pretty much the current leverage profile for the last decade, and it’s worked out well for them. It’s a business that can handle some leverage and still increase earnings.

Railroad ties and utility poles are also a pretty steady business. You can put off projects for a little while, but when these things wear out they’ve got to be replaced. Therefore, Stella can probably support a little more debt than a lot of other companies.

One thing I found interesting when researching this one is the disconnect between how the business performed and how the stock performed.

I love seeing situations where the business has outperformed the stock. It suggests to me that the stock price is set for a big improvement as the stock catches up to the business.

Over the last decade, Stella Jones shares are up 50.8%. Yet earnings increased 167% between 2017 and 2026, assuming analyst projections of $6.32 per share for this year are correct.

A decade ago, Stella traded for between 18 and 22x earnings. That number is down to 12x earnings today. I’m skeptical the company can trade for 20x earnings again; I think that’s too damned expensive. But I also think 12x is too cheap for a company that can grow by 10% per year. I’d say 15-16x earnings is probably a reasonable valuation.

The company is also cheap when we look at the dividend yield. It offers a 2.1% yield on a forward basis. That’s not quite the highest yield in a decade — 2020 and 2022 were higher — but it is much better than average. We’re about 40% higher than the mean dividend yield here. So although 2.1% doesn’t scream impressive yield, it’s pretty rare that Stella Jones offers a yield higher than 2%.

Finally, let’s compare Stella to Kopper. This isn’t a perfect comparison, since Kopper is more than a railway tie and utility pole manufacturer. It’s vertically integrated. Stella Jones buys the compound needed to treat its wood, while Kopper produces it in house — along with other chemicals. About half its revenue comes from the Railroad and Utility Product division. Chemicals is a commodity business with loads of competition. It generally doesn’t trade at a very high valuation.

Something interesting is happening here. For the first time in a decade, Kopper trades for right around the same valuation as Stella Jones. This suggests to me that Kopper might be overvalued, and Stella might be cheap.

Stella Jones has quietly become one of the best TSX dividend growth stocks, putting together an impressive streak of consecutive dividend hikes. The company has 22 consecutive years of raises behind it.

The future here looks pretty good, too. There’s still growth potential, as we talked about earlier. If earnings grow by say 8-10% annually, then dividends should grow at the same pace. We could even see dividend growth outpace earnings growth, since the payout ratio is so low.

The current payout is $0.34 per share quarterly, or $1.36 annually. The company is expected to make $6.32 this year. That gives us a low payout ratio of just 22%. I’d put the chances of a dividend cut here at about zero.

Dividend safety: High
Dividend growth: 8-10%

One criticism I get when I write about stocks with 1-2% yields is they just don’t pay enough. In situations like that I like to turn to shareholder yield, which also includes buybacks as a valid way to return capital to shareholders.

Stella has a nice long-term history of repurchasing shares. At the end of 2016, the company had 69.2M shares outstanding. That number is down to 54.6M today. That works out to about a 21% reduction in a decade. And that’s after a bit of a lackluster start, too.

A million shares repurchased per year plus the current 2.1% dividend yield, and you’re looking at right around a 4% shareholder yield. Not bad at all.

Let’s review by seeing if Stella Jones checks off all our boxes. As a reminder, we’re looking for:

The moat is good, but the ability of the unnamed railway getting into the rail tie business stops me from calling it excellent. The stock is temporarily cheap on a number of different metrics. The balance sheet is pretty good, although I’d like to see a bit of improvement. Growth numbers have been solid, and expansion looks poised to continue. Dividend growth has been excellent, and share buybacks should continue.

Stella checks off the boxes we’re looking for around here. This is one I’ve owned for a while, and I’ve been adding to it recently in the low-$70 range. Today we’re a little cheaper than that, which I think it an excellent opportunity.

Author owns shares of Stella Jones. Nothing written above is investment advice. It is for research and educational purposes only. Consult a qualified professional before making any investment decisions.