Canadian Stocks Analysis

The Company in a Nutshell

• TCL is the Canada’s largest printing company.
• With the acquisition of Coveris Americas, TCL is moving toward the packaging business.
• The company is now a leader in packaging and expect to develop new markets.

Business Model

Transcontinental Inc provides printing services in Canada and North America. The Company publishes consumer magazines and French-language educational, and community newspapers in Quebec and in the provinces of Atlantic. The largest printer in Canada, TCL is now moving its business toward packaging with the acquisition of Coveris Americas in 2018. The company operates 44 facilities employing more than 9,000 workers.

Source: TCL website

The company was evolving into a dying business (printing) and decided to proceed with a major transformation about a decade ago. The company now shows more than 50% of its revenue coming from packaging.

Source: Sep 2018 TCL presentation

Growth Vectors

Source: Ycharts

TCL hasn’t only diversified its business model in the past 10 years, it also found a way to generate more revenue. You can clearly see on the previous graph that it was about time. While revenues were on a down slope for several years, the acquisition of Coveris Americas is opening doors to new opportunities.

First, the company expects to generate economies of scale. Now that it operates an integrated platform with 21 new facilities, management plans on improving its margins as it integrates its new business.

Second, this transformational acquisition also leads to new markets for TCL. The company will now develop new market-ends such as agriculture, protein, beverages, performance packaging and advanced coating.

Finally, as the largest printer in Canada, TCL continues to optimize its printing business and generate consistent earnings. This is a continuous source of cash flow that will remain for several years. While revenue slowly decreases, TCL can use this extra cash flow to boost its packaging business.

Potential Risks

In a world where environmental values rise, we can wonder if it’s mandatory to print flyers and magazines.  For example, Montreal will debate if it’s going to allow the Publisac distribution going forward. While less people read printed publications, the environmental factor could hurt TCL business model faster than we can imagine. This is what often happens to consumer cyclical stocks; they either ride a wave or get swallowed by it. You can find better dividend paying consumer cyclical stocks here.

Source: Ycharts

TCL’s transformation toward a packaging business isn’t made without sacrifices either. The company saw its long-term debt surge by $1B following its acquisitions in 2018. The weight of this debt will not help TCL to remain competitive in a “hostile” environment where other US players may eye the company’s market shares in Canada.

TCL is at a cross-road and management must successfully integrate Coveris Americas. If new markets aren’t developed as expected, TCL will be left with not much growth vectors.

Dividend Growth Perspective

TCL has continuously increased its payout every year since 2002. In fact, TCL has been known for a shareholder friendly stock for a while now:

The company has been able to maintain a mid-single digit dividend growth rate while keeping its payout ratio well under control. Over the past 5 years, TCL showed an annualized growth rate of 5.59%.

Source: Ycharts

The price drop in 2018 led TCL to pay an interesting yield for income seeking investor. We expect TCL to continue increase its dividend by a mid-single digit growth rate going forward. With a payout ratio around 30%, there is plenty of room for TCL to increase its payments while continuing their business transformation.

TCL meets our  7 dividend growth investing principles.

Valuation

When you consider TCL major price drop from low $30’s to under $20, you may wonder if there is a deal here or if it’s a falling knife. Over the past 3 years, TCL valuation has been quite hectic going from a 5 PE ratio to as high as 12.50.

Source: Ycharts

For this reason, we rather use the dividend discount model to determine if there is an interesting entry point around $19. We used conservative dividend growth rates (5%) as we are a bit skeptical about the company’s growth vector. Since TCL contracted an important debt for its acquisitions, we used a discount rate of 10%.

Please read the Dividend Discount Model limitations to fully understand my calculations.

If you are expecting a 10% return on your investment, TCL price is still steep at $19. However, the company could turn things around fast if it successfully moves toward the packaging business.

Final Thoughts

TCL is the largest player in a mature (read slowly dying) industry; printing. As the world is going mobile, you can wonder who is reading printed copies these days. Fortunately for investors, management is well aware of the situation. This is why the company has performed a major transformation toward the flexible packaging industry. With the Coveris Americas transaction, TCL acquired of a strong expertise in technical film production that enabled insourcing of film manufacturing. This also helped to expand their portfolio and opened new markets. If management can achieve their transformation and generate economies of scale, TCL continues to please its shareholders with a ~4% yield.

If you made it this far, let’s be honest; you liked what you read. Now it’s time to make sure you don’t miss our next analysis and you subscribe to the Moose Newsletter by clicking on this link to make sure you don’t.

Disclaimer: We do not hold TCL.A.TO in our Dividend Stocks Rock portfolios.

Featured image source: Pixabay

The Company in a Nutshell

• Norbord is the largest oriented strand board (OSB) in North America.
• These panels are mostly used in the construction industry.
• OSB counts on the U.S. home construction industry to grow in the upcoming years.

Dividend investors often seek to put their money in a market leader that pays now. The idea of investing in a Canadian stock providing a strong payout is tempting. After all, you get rewarded right away. Norbord (OSB.TO) presents these characteristics. The company pays a yield over 6% and is a leader in its’ market. Unfortunately, this dividend isn’t built on strong foundations. Let’s dig deeper to see what OSB is made of!

Business Model

Norbord Inc is a producer of wood-based panels. It is engaged in manufacturing, sales, marketing and distribution of panelboards and related products. OSB is the largest manufacturer of oriented strand board (OSB) in North America with over 7.1 billion square feet of capacity. Norbord is a rare basic material company paying dividend.

OSB is a type of engineered wood similar to particle board, formed by adding adhesives and then compressing layers of wood strands (flakes) in specific orientations. The company has over 15 plant locations in the United States, Europe and Canada. About 25% of its’ production capacity is in Europe.

Source: Norbord Q2 2018 investors presentation

Growth Vectors

Source: Ycharts

Norbord made a major move in 2015 with the acquisition of Ainsworth. This added over 2 billion square feet capacity and made OSB the largest manufacturer in North America. This was an all-share transaction where Ainsworth shareholders received 0.1321 of a share of Norbord for each Ainsworth share. Ainsworth is now a wholly-owned subsidiary of Norbord.

Source: Norbord Q2 2018 investors presentation

Norbord is not only the largest OSB producer in North America, it is also an important player in Europe too. Wherever there is housing construction, Norbord will have its’ piece of the cake. Unfortunately, Europe GDP has been anemic for the past few years. On the other side, the wind is blowing toward the right direction in the U.S.:

Source: Norbord Q2 2018 investors presentation

If management’s projections become true, Norbord will have two-three years of strong demand for its’ products going forward. We are far from the 2 million housing starts of 2005, but a healthy housing market is around 1 million housing start in the U.S.

Potential Risks

OSB is pretty much a one trick pony company. When the housing construction business is healthy, Norbord uses its’ gigantic capacity (the second largest producer has about 5B square feet vs 7.1B for OSB) to surf on that tailwind. However, each time there is a recession, OSB will be left with nothing. The combination of rising interest rate and high household debt level may slow down the economy faster than we expect. This would hurt housing starts and bring back OSB to darker years.

Being the largest producer in an industry is not always a plus. Norbord can run full speed and generate lots of cash flow, but can also be stuck with overproduction and suffer from several fixed costs in its’ budget. This industry suffers from overcapacity since 2006. This limits OSB price growth potential in the upcoming years. Finally, keep in mind that the juicy 6% dividend was cut not too long ago. The company is showing zero dividend growth in the past 5 years.

Dividend Growth Perspective

As mentioned in the risk section, OSB dividend growth isn’t a real one. There have been two dividend cuts in the past 5 years. Management grew its dividend back to $0.60 (from $0.10) and rewarded shareholders for their patience with a special dividend in 2018.

Source: Ycharts

Going forward, don’t expect much dividend growth. Shareholders may get lucky and have 2-3 years of dividend growth. But when the next recession comes, OSB may as well cut its’ dividend again. Remember; high yield – high risk.

OSB doesn’t meet our  7 dividend growth investing principles.

Valuation

While management wants us to believe the future is bright, OSB has suffered on the stock market in 2018. Unfortunately, investors don’t see much value in OSB as it trades at a very low PE ratio:

Source: Ycharts

Remember that a low PE doesn’t always mean that there is a deal. This may be caused by a lack of growth (or higher risk potential).

We used a 2% dividend growth rate for OSB when we ran the dividend discount model calculation. This is more than what the company gave over the past 5 years considering the dividend cut, but we believe the company could increase its’ payment in the next few years.

Please read the Dividend Discount Model limitations to fully understand my calculations.

Unfortunately, we don’t see how we could use strong dividend growth figures. At this point, there is no deal on OSB.

Final Thoughts

We totally understand why investors would like to invest in Norbord. The company is a leader in its’ market. Demographic should help housing construction in North America in the upcoming years. The company is paying a 6%+ yield. Is there anything to not like about this company? Unfortunately; yes. As the economy is strong, OSB looks great. Keep in mind the dividend was cut not too long ago as OSB needed additional cash to survive a weaker period. More recessions will come and OSB will be dependant on the housing market.

If you made it this far, let’s be honest; you liked what you read. Now it’s time to make sure you don’t miss our next analysis and you subscribe to the Moose Newsletter by clicking on this link to make sure you don’t.

Disclaimer: We do not hold shares of OSB.TO in our Dividend Stocks Rock portfolios.

Featured Image Source: Pixabay