Thursday, January 3, 2013

Hammond Power Solutions Inc

I do not own this stock (TSX- HPS.A, OTC- HMDPF). Here is the hype that I read about this stock in the Buy-Sell Adviser published by MPL Communications.

This stock was recommended by Ryan Irvine of Keystone Financial. He said to expect volatility, but that the stock will be a good long-term buy over the next one to three years. He expects the company will change from a semi-annual dividend to a quarterly one in 2013. I have reviewing it as Ryan Irvine has suggested some very good stocks in the past.

First I will answer the question of whether or not it has made money for its shareholders. Well, the last 5 years have not been great. Total return is just 3.9% per year. It hit a high in 2007 and was hard hit by the recent recession. Since this an industrial company, this is not surprising. However, if you look at the return over the past 10 years, it is at 25.8% per year.

Since dividends only started in 2009, not much of the above total returns are from dividends. Over the past 10 years, it is just 0.72% and over the past 5 years, it is at 1%. Although current dividend yield is 2.2%, over the past 3 years, the median is just 1.27%. The other side of the coin is that dividends have risen by 22.5% per year over the past 2 years since they have been started. For 2012, the dividends have increased by 20%.

If these increases continue, then the potential future in dividends looks good. Using the current dividend yield of 2.2% and increase of 20% a year, you could be earning almost a 14% yield on stock purchases today in 10 years. In 15 years, you could have a yield 34% on a stock purchased today.

The next question has to do with Dividend Payout Ratios, or can the company afford the dividends? This is a definite yes. The DPRs for earnings over the past 3 years is 15.7%. The DPRs for Cash Flow is 10%. (See my site for information on Dividend Payout Ratios).

The next question is about the strength of the balance sheet (or if you prefer the debt ratios). The current Liquidity Ratios are great. The 5 year median Liquidity Ratio is 2.18. The current one is a bit lower at 1.75. However, they are above the 1.50 I like. The Debt Ratio is also good. The current one is 2.84 and the 5 year median is 2.98.

The current Leverage and Debt/Equity Ratios are also quite good at 1.57 and 0.55, respectively. The 5 year median values for these ratios are 1.70 and 0.70.

The Return on Equity is one place for 2011 the rate was not hot. It was only 6.6%. However, the 5 year ROE is much better at 12.4%. You want the 5 year median to be at 10% or higher. The ROE on comprehensive income is pretty close to the ROE on net income.

There are two classes of shares. Class A common shares is the subordinate voting shares and Class B common shares has with four votes per share. Class B shares are convertible into Class A subordinate voting shares on a one-for-one basis.

This company has good growth and a nice dividend. I just bought some of this stock as my main purchase with my new money into my TFSA for 2013. I bought some more Automodular Corp (TSX-AM) as my fuller stock purchase (that is to soak up the excess money left in my TFSA after my main purchase.) I intend to have some fun with my TFSA. Since I am already living off my dividends the TFSA will not be adding much to my income for some time.

Please note that this is an industrial stock and it is rather a small company, so the risk level would be rather high.

Hammond Power Solutions Inc. is the largest manufacturer of dry-type transformers in North America. They engineer and manufacture a wide range of custom transformers that are exported globally in electrical equipment and systems. They support solid industries such as oil and gas, mining, steel, waste and water treatment, and wind power-generation. Its web site is here Hammond Power Solutions. See my spreadsheet at hps.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 or StockTwits.

1 comment:

  1. Hammond Power Solutions looks like a great company. This is mainly because they grew their dividends so much in 2012. Altough the risk levels are high with this stock.