Morneau Shepell Inc

I do not own this stock of Morneau Shepell Inc. (TSX-MSI, OTC- MSIXF). Everyone once in a while I go through the stocks that my brokerage, TD Waterhouse, is recommending to find promising new stocks. This stock was rated a buy recently by TD Waterhouse. It was under Diversified Financials.

I first looked at dividends. TD had listed a 6% dividend, which is good. The dividends for this company started in 2005. They had a few increases until it decided to convert from an income trust to a corporation. They then decreased the distributions by 17.5%, but retained a monthly distribution format. This was effective January 2011 and distributions have remained level since. I would like it better when it can increase dividends.

I next looked up the earnings estimates as the 2012 financial report has not yet been produced. I wanted to check the Dividend Payout Ratios. The DPR ratios for EPS were high, with the 2012 estimates at 136%. However, this was expected to move below 100% by 2014. The DPR ratios for CF were better as they were in the 70% range. I would like it better if the DPRs were much better, especially the DPR for earnings.

Next I check the stock prices over the years to see if the company has made any money for their shareholders. Well, they have made some money for the shareholders who bought at the time of the IPO (initial public offering), but not much over the past 5 years.

For those who bought at the IPO the return has been 9.87% per year with 6.84% per year from distributions and 3.03% per year from capital gains. Over the past 5 years this stock has gained 3.51% per year for its shareholders, with 6.33% per year from distributions and a capital loss of 2.82% per year. I do not much like stocks where you gain dividends, but lose capital.

I finished off the spreadsheet. The first thing that I do not like is the very high Dividend Payout Ratio in regards to earnings. The 5 year median DPR for earnings is 214%. It has been coming down with the one for 2012 expected to be at 162%, for 2013 to be 128% and for 2014 to be 99%.

Another thing is that the Intangible and Goodwill assets have been higher than the stocks' market cap (106% in 2011). However, with the 3rd quarter of 2012 these assets are now only 87% of the market cap.

The outstanding shares have been increasing strongly mainly due to acquisitions. This is not bad within itself as long per share values are increasing. However, growth in Book Value per Share is very low at 3.7% and 2% over the past 5 and 10 years.

This stock has a good dividend yield at 6%, but I prefer stocks that have growing dividend. I do not think that they will be in a position to raise their dividends for some time. I would not be interested in this stock at this point in time, so I am not waiting for the fourth quarterly results to report on this stock.

The Earnings per Share growth is not great. The one for the past 7 years looks good, but it starts from a very low point. The earnings using the 5 year running average has grown over the past 3 years at 6.5%. This is ok, but not great.

Cash flow growth is not great either at 0.25% over the past 5 years and the 5 year running average growth over the past 3 years is at 6.8%. The 7 year growth looks very good, but this is starting from a low level. The 5 year running averages growth is probably a better indicator on growth for this company.

The Return on Equity is quite low with the ROE for the last 12 months at just 5.6%. The 5 year median ROE is also just 5.6%. The ROE on comprehensive income is a bit better at 6%.

A good thing about this stock is the growth in revenue. Revenue has grown at 23% and 20% per year over the past 5 and 7 years. Revenue per Share is good at 11% and 10.5% per year. The 5 year running average growth over the past 3 years is almost 10%, so this is good.

Another good thing is the debt ratios. The current Liquidity Ratio is 1.97. The current Debt Ratio is 2.51. The current Leverage and Debt/Equity Ratios are also quite good at 1.66 and 0.66, respectively.

When I look at analysts' recommendations, I find Buy, Hold and Underperform recommendations. The consensus recommendation is a Hold. The 1 year stock price is $16.30, implying a return of 8.94% with 5.91 from dividends and 3.03% from capital gains.

The P/E is 21.64, a ratio below the 5 year median of 22.13 for this stock. I get a 2013 Graham Price of $10.81 and the P/GP ratio is 1.22. This is between the 10 year low and median P/GP Ratios of 1.12 and 1.23. The current P/B Ratio is 1.55 and the 8 year median P/B Ratio is 4% lower at 1.48. I cannot use the dividend yield test as dividends have been travelling down.

The testing suggests that the current price is relative good to reasonable. However, I think that the P/E Ratio of 21.64 is too high a P/E ratio for this stock. In other words, the price may be relatively good; I just do not think it is really that good on an absolute basis. Yes the dividend yield might be good, but there is not much growth possible for capital gain. I would not buy it at this relatively price. It cannot grow it dividends and without that, the capital gain will not grow, for the value of this business will not grow.

Morneau Shepell Inc. is provides human resource consulting and outsourcing services. The firm delivers solutions to assist employers in managing the financial security, health and productivity of their employees. Its web site is here Morneau Shepell. See my spreadsheet at msi.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.