K-Bro Linen Inc

On my other blog is some comment on "Solidarity Against Austerity". See comments blog.

I do not own this stock of K-Bro Linen Inc. (TSX-KBL). I have found this stock interesting ever since I have first heard about it at the 2009 Toronto Money Show. A lot of speakers were talking about the great yields that could still be gotten from Unit Trust companies. This company was a Unit Trust at that time.

This company stopped dividend increases in 2006 when the tax laws for income trusts were changed. Since that time dividend yield has been travelling south, but so have the Dividend Payout Ratios. In 2006 the median yield was 7.55% and DPRs for earnings and cash flow were 141% and 132%. In 2011, median yield was 5.56% and DPRs for earnings and cash flow were 99% and 42%, respectively.

In 2011 was the first year they raised the dividends and this was a 4.5% increase. DPR for earnings is expected to be 85% for 2012. Current dividend yield is down to 4.55%.

The total return over the past 5 and 7 years is at 23.1% and 16.7% per year. The portion of this return from dividends is 7.9% and 7.1% per year. The portion of this return from capital gain is 15.2% and 9.6% per year. Dividend income makes up 34% and 44% of the total return.

There are a couple of reasons that future growth may not be the same. The first reason is dividend yield has come down. The median dividend yield over the past 5 years is 8%. The current dividend yield is 4.55%. It was expected that a combination of dividend decreases and/or stock price increases would lower dividend yield on old income trust stock to the 4% to 5% range. It has been stock increases that have been going on for this stock to lower the dividend yield.

I am not saying that you will get a decent return going forward; I am just saying that that you should not expect it to be as good as in the past. Dividend growth companies tend to have capital gains in line with dividend increases on a long term basis. If you go by what is currently happening, the future total return would be in the range of around 9%, with 4.5% from dividends and 4.5% from capital gains.

They have twice issued more stock, in 2006 and 2008. They used the money for equipment and business acquisitions. So, the 5 and 6 year increase in shares is at 5% and 8% per year. This affects the "per share" values and you can see that such things as earnings and revenues have grown much quicker than earnings per share (EPS) and revenue per shares. As a stock investor, you are, of course, interested in both, but mostly in the "per share" values.

Because this company only went public as an income trust on February 3, 2005, I generally have only 6 and 7 years maximum of financial information available. The original company was started in the early 1950"s in Edmonton.

Too see differences because of the issuance of new stock, I have revenue growth over the past 5 and 8 years at 12.4% and 14.7% per year. The revenue per share growth over the past 5 and 8 years is at 7.1% and 8.3% per year.

Earnings growth over the past 5 and 6 years has been decent at 7.9% and 7.4% per year, respectively. Cash flow growth has been at 12.2% and 7.7% per year over the past 5 and 6 years, respectively. There has been no growth in book value. Because income trust companies pay out in distributions more than they earn, book value generally goes down. For the 1st quarter of 2012 the book value went up modestly.

The Liquidity Ratio tends to be a little low, with the current ratio at 1.27. However, the company does have a good cash flow. The Debt Ratio is very good, with a current ratio of 3.21. The current Leverage and Debt/Equity Ratios are also good at 1.45 and 0.45, respectively.

The Return on Equity has been very good over the past three years with a rate just over 12% and in the good 10% to 15% range. The ROE for 2011 was 12.6% and the 5 year median ROE is 12.3%. The comprehensive income is always quite close to the net income and the ROE for comprehensive income for 2011 was also 12.6%.

This company has made the transit from income trust to corporation looking very good. The dividend increase in 2011 shows that the management is optimistic of the future.

K-Bro is the largest owner and operator of laundry and linen processing facilities in Canada. K-Bro provides a comprehensive range of general linen and operating room linen processing, management and distribution services to healthcare institutions, hotels and other commercial accounts. K-Bro currently has seven processing plants in six Canadian cities: Quebec City, Toronto, Edmonton, Calgary, Vancouver and Victoria. Its web site is here K-Bro. See my spreadsheet at kbl.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.