Friday, May 4, 2012

Davis & Henderson Corp 2

I own this stock (TSX-DH). I first bought this stock in2009 and then bought more in 2010 and 2011. I have made a total return of 15.9%. Of this total return, 10.3% is attributable to dividends and 5.6% to Capital Gains. Dividends make up almost 75% of my return.

When I look at insider trading, I find a minor amount of insider buying of $1.1M. Buy was by CEO and directors. It looks like insider have recently been retaining their options, and this is a good sign. Everyone but directors have more options than shares.

There are some 36 institutions that own 27% of the shares of this company. Over the past 3 months, they have decreased their investments in this company by almost 25%. However, institutions seem to be buying shares over the last few days.

I have 5 year median Price/Earnings Ratios of 8.03 and 11.92. The current P/E Ratio of 10.7 is showing a relatively high stock price. These are rather low P/E ratios, but this stock used to be an income trust paying out most of its income.

I get a Graham price of $22.09. The 10 year low and median difference between the Graham Price and stock price is the stock price being 26% and 10% lower than the Graham Price. The 10 year high difference is the stock price being 6% higher than the Graham Price. The current stock price of $19.42 is 12% lower than the Graham Price and shows a reasonable stock price.

The 10 year median Price/Book Ratio is 1.75. The current P/B Ratio of 2.19 is some 25% higher and shows a relatively high stock price. The problem with Income Trust companies was that they did not grow their book value because they paid out too much in dividends.

The current dividend yield of 6.39% is some 36% higher than the 5 year median dividend yield of 9.93%. Of course, the dividend has been cut when this company was no longer an income trust. You would expect the dividend yield to be lower.

The thing with companies that change from Income Trusts to Corporation is that you expect the dividends yield to go lower and the P/E ratio to go higher. This does not help in trying to test whether or not a stock price is reasonable. Here we get mixed results. However, the price is not unreasonable. Also, the stock price is lower than the relatively median stock price in 2011 when the change from Income Trust to Corporation took place.

When I look at analysts’ recommendations, I get Strong Buy, Buy and Hold. The consensus recommendation would be a Buy. The consensus buy comes with a 12 months price target is $20.40. One analyst likes the good dividend yield and feels it is safe.

One analyst mentions that their main business is printing cheques, which is a slowly eroding business. The company is trying to replace this business. The company just bought Avista Solutions, a company that is a leading provider of mortgage loan origination software to community banks and credit unions in the United States.

This stock is mentioned in a number Cruncher article in February 2012. See G&M.

I will hold on to the shares I have now. These shares form only 1% of my portfolio. I believe that this company has a future. I would expect over the longer term the dividend yield will go lower to between 4 and 5% and that it will have modest capital gains of 3 to 4%. This suggests a 7% to 9% total return. The consensus price of $20.40 suggests a 12 month total return of 11%.

Davis & Henderson is a leading solutions provider to the financial services marketplace. Founded in 1875, the company today provides innovative programs, technology products and technology based business services to customers who offer chequing accounts, credit card accounts and personal, commercial, and other lending and leasing products. Its web site is here Davis & Henderson. See my spreadsheet at dh.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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