Wednesday, May 1, 2013

Melcor Developments Inc

On my other blog I am today writing about Mutual Funds ...continue...

I own this stock of Melcor Developments Inc. (TSX-MRD, OTC-MODVF). I first bought this stock in 2008 and some more in 2009. I have made a return of 13.86% per year with 2.69% from dividends and 11.17% per year from capital gains. Dividend on this company is paid twice yearly.

The reason I have done so well is because the stock I bought in 2009 was a lot cheaper than stock I bought in 2008. This company has hit hard by the last economic crisis. Earnings were down and dividends were cut by over 40% in 2009. Dividends have been increasing since then. The last increase was for 4.5%, but it was the second increase for 2012 and the total increase for 2012 was 12.5%.

I know a lot of people do not like companies that decrease dividends, but I am not one of them. I rather a company behave prudently and pay out in dividends only what they can afford. Dividend growth on this company over the past 10 years is good at 16%. However, dividend growth over the last 5 years is low at just 2.3%. This is because of the 2009 decrease.

The Dividend Payout Ratios are good on this company with the 5 year median DPRs for earnings at 24% and the DPRs for cash flow at 52%. (The company's CFPS has been lower than the EPS over the past 2 years. It would not be good if this continues. )

The outstanding shares have decreased by 0.7% and 0.1% per year over the past 5 and 10 years. The shares have increased due to stock options and decreased due to share buy backs. The change in outstanding shares is really nominal.

Revenue has increased by 5.8% and 9.5% over the past 5 and 10 years. Revenue per Share has increased by 6.5% and 9.7% per year over the past 5 and 10 years.

The Earnings per Share growth is also good at 10% and 16% per year over the past 5 and 10 years. The Cash Flow per Share growth is not as good, growing at just 2.3% and 0.6% per year over the past 5 and 10 years. However, for CFPS, the 5 year running average growth is better, especially for over the past 10 years. The CFPS growth here is at 2.8% and 8.4% per year over the past 5 and 10 years.

The Book Value per Share has grown well also at 20% and 19% per year over the past 5 and 10 years. I should also point out that under the new IFRS accounting rules Real Estate company's EPS and BV seem to be higher than under the previous rules.

The Return on Equity is good with a ROE of 15.2% for 2012. The ROE for Comprehensive Income is similar at 14.9% for 2012.

This company has a very strong balance sheet. The Liquidity Ratio 3.61 and the Debt Ratio is 1.92. The Leverage and Debt/Equity Ratios are fine at 2.10 and 1.09.

As I had mentioned earlier, the EPS/CF Ratio has been higher than 1.00 over the past 2 years. When the EPS/CF ratio is higher than 1.00 it means that the earnings are higher than the cash flow. This is not the first time this has happened for this company. UC-Berkeley accounting professor Richard Sloan has found through a number of academic studies that companies with cash flow higher than earnings outperform companies with earnings higher than cash flow.

This is a real estate company and I bought it for diversification purposes. I probably paid too much for it when I initially bought it in 2008. However, I bought more in 2009 because I thought that the market did overreact to bad news from this company. I will hold on to my shares and I believe that this company will do fine for me and my portfolio. See my spreadsheet at mrd.htm.

This company is primarily engaged in the acquisition of land for development and sale of residential communities, multi-family sites and commercial sites. It operates western Canada and the US. The company also develops, owns and manages commercial income properties, as well as four golf courses. Its web site is here Melcor.

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. I took a brief look at the financials (I used google financial).

    The company has negative cash flow in 2 out of the last 4 years. The most recent year, they are over 30 million negative cash flow.

    I believe that they are borrowing money to pay their dividends and the financials seem to support this contention.

    I view this company as highly speculative.

  2. I just looked at Google finance and they did not have any negative cash flow in the last 4 years. I do not know where you are looking.

    They had a negative cash flow in 2008, which was the only year since 1995. In this year, when you consider WC there is no negative cash flow.

    I do not see that they are borrowing to pay dividends????

  3. I agree with you Susan; I have looked at Melcor and they look like a good investment to me.

  4. Well I just looked at Google again. Look at the Cash Flow statement, specifically two items: Cash from Operating Activities and Capital Expenditures. If Capital Expenditures exceeds Cash from Operating Activities then the company is spending more money than it makes.

    From what I can see, in two of the last four years, they have spent more than they have made - negative cash flow.

    The only way I can think of for paying dividends if you are in negative cash flow is 1. Use of retained earnings or 2. borrow money to pay the dividends.

    I see their long term debt growing so I am assuming that they are borrowing to pay dividends BUT I am not sure about this. It just raises a red flag for me.

    If my brief analysis is correct then I say this is a speculative stock.

  5. Companies fund capital expenditures in lots of different ways. I do not see that issuing debt to fund capital expenditures is necessarily a bad thing. Overall in those four years they did not this issue more debt than capital expenditures. Their debt ratios are in the very good category. I do not see that they are doing things that they cannot afford.

    I think that they can afford both the capital expenditures and the dividends quite well. Their debt is well under control. Just because a company rises debt does not mean that should automatically cut dividends. It also does not automatically mean that they are using debt to pay dividends. You have to look at the whole picture.

  6. SP
    Sue, your comments on this one are solid (disclosure-I have owned MRD since 2002(bot about $3) selling some in 2007(mid 20's+) and reacquiring in 2009($5) and since).

    As I see it key points are:
    1-$23 BV understates value per share. While income properties have been written up to market values values undeveloped land, much of which was acquired 10 or more years ago, is carried at cost. In most cases it is worth substantially more.
    2-Most of the land is in Alberta which has GNP per capita of 1.6X the national average, and a top personal tax rate 10% lower than elsewhere in Canada. This virtually assures population growth at above average rates which is positive for MRD's housing land.
    3-The recent IPO of Melcor REIT (MRD still owns 51%) gives MRD an opportunity to more safely develop the $800MM+ of retail/commercial projects it has in the works over the next five years. This on low cost land that will help result in substantial profits when transferred to the REIT.
    4-Conservative ownership and management.