Tuesday, February 14, 2012

Valener Inc

I do not own this stock (TSX-VNR). This used to be Gaz Metro (TSX-GZM.UN) a limited partnership. All of the units held by public unitholders of Gaz M├ętro were exchanged, on a one-for-one basis, for common shares of Valener, effective September 30, 2010.

No matter how you look at this stock, it is not a great dividend stock. Dividends have been declining by 5% and 2.4% per year over the past 5 and 10 years. The Dividends were reduced in 2011 after remaining flat since the last reduction in 2007. Also, the Dividend Payout Ratios remain too high. (See my site for information on Dividend Payout Ratios). These ratios were 122% for earnings and 108% for Cash Flow. These high ratios are not expected to change much in 2012 and 2013. Also, when the company converted to Valener, it said it would guarantee the $1.00 dividend for 3 years.

How have investors faired? Well, the total return over the past 5 and 10 years was 3.4% and 7% per year, respectively. Dividend yield was some 7.3% and 8% per year over the past 5 and 10 years. This means that the stock has suffered capital loss.

The only growth is in Book Value and this is only because it was increased to the stock price on September 30, 2010. This action doubled the book value. However, the book value has been declining since then also. Revenue per share is down 2% per year over the past 5 and 10 years. EPS is down 8% and 4.4% per year over the past 5 and 10 years. Cash flow is down 25% and 14% per year over the past 5 and 10 years. Analysts do not see any improvements for 2012 and 2013.

Return on Equity is low in 2011 at 5% with a 5 year median of 14%. One reason for the much lower ROE this year is the big increase in Book Value. Until 2011, book value has been declining so the ROE looked good. Net Income has been growing (24% or 1.5% per year over the past 10 years) but so has number of shares (17% over the past 10 years). This is why the difference between growth in net income and EPS.

When it comes to Debt Ratios, they are quite good for Valener as the new company has little debt. However, the Liquidity Ratio is low at 0.90. This means that current assets cannot cover current liabilities.

When I look at analysts’ recommendations, I find Hold, Underperform and Sell. There are lots of Hold recommendations and the consensus recommendation is a Hold. One Hold recommendation said that investors might want this stock for long term stable cash flow. One analyst said that the company has a very high quality asset base, but a no growth profile.

I get a 5 year median low and high Price/Earnings Ratio of 11.66 and 12.95. The current P/E ratio is therefore high at 19.98. It is also quite high for a utility. I get a Graham Price of $17.09, so the current stock price of $16.18 is 5% lower. The 10 year median low difference between the Graham price and stock price is the stock price 5% higher. However, this has been changing lately and the 5 year median low difference is the stock price 8% lower.

I get a 10 year median Price/Book Value Ratio of 2.18, so the current P/B Ratio at 1.01 is only 46% of the 10 year median ratio and points to a good current stock price. The current dividend yield of 6.18% is a good one, but it is lower than the 5 year median dividend yield of 7.64% by 19%. The lower dividend yield points to a relatively high current stock price.

The stock price tests I have used show rather mixed results. Part of the problem of looking at this stock over the past 5 and 10 years is that I am using Gaz Metro’s financial statements as this new company hold 29% of the Gaz Metro. How valid past Gaz Metro financial statements are to Valener Inc. is yet to be determined.

Another problem this company has and this applies to all old unit trust and partnership companies is that they will have to get Dividend Payout Ratios into line with other corporations that pay dividends. Since DPR ratios are currently too high and no one seems to expect this to change for this company over the next couple of years and Valener only said they guaranteed the current distribution for 3 years, it would appear that another distribution cut is in the future.

Valener owns 29% of Gaz Metro and also has investments (i.e. Vermont Gas Systems & Green Mountain Power). Gaz Metro is Quebec's leading natural gas distributor. Its web site is here Valener. See my spreadsheet at vnr.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.

1 comment:

  1. They have wind projects coming online in Vermont and Quebec, expansion of their gas networks in Quebec funded 75% by the government over the next years. Low gas prices have set a trend in favor of gas against oil(for industrial and commercial),they're also expanding into the transport industry with Transport Robert. The aquisition of CVPS is also a mystery about how it will affect revenues, some merger goes well, some goes bad. I'm pretty confident in the ceo of GMP to make it succeed.

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