Tuesday, July 24, 2012

Waterfurnace Renewable Energy Inc

I do not own this stock (TSX-WFI). I started reviewing this stock in February 2009 because I saw it being reviewed in the Investment Reporter. See their site here. At that time they thought that it was a risky investment, but it is a buy for capital gains and dividend income.

The one main problem Canadians may have with this stock is that it gets most of its money from the US and therefore it pays dividends in US$ and reports in US$. This could also, of course, be a plus as it gives Canadian investors exposure to the US market. All my values are based on the Canadian currency, because in the final analysis, what is important to a Canadian investor is how well an investment is doing in the Canadian currency.

Because they got so much of their money from the US, this company pays dividends in US$. This will naturally add volatility to dividend payments. At best, every dividend payment will differ slightly. At worse, because changes in our currency against the US currency you may not see the benefit of dividend increases or they may be magnified.

Growth in dividends has certainly been better in US$ terms with the 5 and 10 year growth at 12.5% and 17.4% per year respectively. Growth in CDN$ terms over the past 5 and 10 years is at 5.6% and 14% per year, respectively. Of course, the future is not necessarily like the past when it comes to exchange rates.

As far as total returns go, this is negative for the past 5 years, with total returns down 5.89%. Dividend returns were 3.87%. Capital losses were at 9.76%. The thing with dividend paying stock is that you earn income while you wait for better times.

However, the 10 year total returns on this stock were great with total returns at 25.54% per year. The dividend portion of this return was 7.85% per year at 30% of the total return. Capital gain was 17.70% per year.

The 5 year median Dividend Payout Ratios for earnings is at 74% and for cash flow is at 64%. The DPRs for 2011 were at 79% for earnings and 64% for cash flow. The DPR for this year for earnings is expected at 81%. (The 10 year median DPR for earnings is higher than the 5 year one and it is at 78%.) (See my site for information on Dividend Payout Ratios).

There is not much difference between revenue and revenue per share growth as the number of shares over the past 5 and 10 years has changed only marginally. The revenue per share growth is the lowest growth for this company with 5 and 10 year growth at 5.6% and 6.2% per year, respectively.

The company has obviously become more efficient, because it has better growth in earnings and cash flow than in revenue. However, this can only go so far. Eventually, it will need better growth in revenue to push better growth in earnings and cash flow.

Growth in Earnings per share is good, with the 5 and 10 year growth in EPS at 7.7% and 9.3% per year, respectively. Growth in cash flow per share is also good, with the 5 and 10 year growth at 10.2% and 8.6% per year, respectively.

Growth in book value is better over the past 5 years than over the past 10 years with 5 year growth quite good at 14% per year and 10 year growth lower at 6.7% per year.

The return on equity for this stock has always been very good, with the ROE for 2011 at 33.4% and the 5 year median ROE at 47.3%. The ROE for comprehensive income is the same as the ROE on net income as there is no difference between comprehensive income and net income.

The last thing to look at is debt ratios. The debt ratios on this stock are very good as the company has little debt. The current Liquidity Ratio at 5.15 is very high as it the lower but still high 5 year median Liquidity Ratio at 4.14. The current Debt Ratio is also very good at 2.45. The 5 year median ratio is 2.47.

The current Leverage and Debt/Equity Ratio are also very good. Here lower is better and these ratios are currently at 1.69 and 0.69. The 10 year median ratios are also very good at 1.66 and 0.66.

This is a rather small company so it is riskier than a lot of dividend paying stock. The company has not financially recovered from 2008, but it is making headway. Since its head office is in Fort Wayne, Indiana, USA, it is essentially an American company listed on the TSX. It has the potential to produce for dividends and capital gains for its shareholders.

WaterFurnace International, Inc. is a leading manufacturer of residential, commercial, industrial and institutional geothermal and water source heat pumps. Products from WaterFurnace include energy-efficient and environmentally friendly geothermal comfort systems, indoor air quality products and pool heaters. Its web site is here Waterfurnace. See my spreadsheet at wfi.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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