Thursday, October 7, 2010

Finning International Inc

I do not own this stock (TSX-FTT). When I was in the market to buy an industrial stock in this area, at the time I liked Toromont Industries (TSX-TIH) better, so that is what I bought. See my latest reports on Toromont at report 1 and report 2. See my spreadsheet on Toromont at tih.htm.

When I look at the dividend information on Finning, I find that the dividend yield is often between 1% and 2%. It is currently at 2%. The dividends have been higher than usual for 2008 and 2009 because the stock’s price has been depressed. The 5 year average dividend yield is at 1.8%, but historically, the 5 year average has been closer to 1.3%. On a current investment, you could have a 5.8% return on your money in 5 years time and a 12.8% return in 10 years time. That is on a current purchase of the stock at the current stock price of $23.85.

For this stock, the 5 year growth in dividends averages 17% per year. However, you should probably take inflation into account when looking a future returns on your current investment. Long term background inflation runs at about 3%, but current inflation is low, so if you reduce these returns by an inflation rate of 2%, you could be earning 5.3% and 10.7% return in 5 or 10 years on a current investment. This is how you can end up living off your dividends. I want stock’s where the dividends grow faster than inflation. Usually, the lower the dividend yield, the higher the dividend yield growth. However, this is also a growth company and that is why the dividend is increasing at such a high rate.

When looking at growth, the 10 year figures are generally better than the 5 year figures. This is because this stock has been hit hard by the current recession. The only area where growth was better for the 5 year figures was in connection with cash flow. The company reduced administrative expenses, account receivables and inventory for 2009. Cash Flow growth over the past 5 years grew at the rate of 24% per year mainly because of growth in 2009. Revenue growth was not great for the last 5 and 10 years coming in at 3.3% and 7% per year, respectively, for the last 5 and 10 years. Mainly this is because revenues fell about 21% in 2009.

Also, book value growth has not been good coming in at 3.4% and 7.4% per year over the last 5 and 10 years, respectively. This is because there was a 10% drop in book value in 2009. The company took a loss on the sale of Hewden Stuart Limited (UK) business in 2009. This was strategic move on the part of the company.

In the last few years, the company has really strengthened its balance sheet and currently has a very good liquidity ratio of 2.26. The Asset/Liability Ratio is also very good at 1.67. It is important to have a strong balance sheet in a recession. The Return on Equity has a 5 year average of 11.3% to the calendar year ending in 2009. The ROE for 2009 is a decent 8.6% and the one for the first 2 quarters of 2010 is also decent at 8.7%. The current accrual ratio is also very good at -12.7% where anything below -5% is very good indeed.

Even though I do not regret the decision I made to buy Toromont instead of this company, this is still a very good company. Tomorrow I will talk about what the analysts say.

This company sells, rents and provides customer support services for Caterpillar equipment and engines. They cover Canada, UK, Argentina, Bolivia, Chile and Uruguay. Its web site is here Finning. See my spreadsheet at ftt.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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