Monday, November 18, 2013

Brookfield Office Properties

On my other blog I am today writing about Bicycle Riding in Toronto...continue...

I do not own this stock of Brookfield Office Properties (TSX-BPO, NYSE-BPO). In November 2008, I was looking at some stocks on the Dividend Aristocrats List that I do not own. The first one I found was Brookfield Properties (TSX-BPO). I did not know this stock and had not tracked it, so I took a look at it.

Here you meet the problem with the Dividend Aristocrats List. This is stock was taken off the list because it has not raised its dividend since 2008. This list changes often enough that may make it an unreliable source to find new good stocks. But when I was looking at it in 2008, many people felt that the stocks on such a list were the best.

Looking at the insider trading report, I see that lots of people have options, but there is not that much share ownership except for a few directors. Two directors own shares and one owns shares worth $3.4M and one owns shares worth $6.6M. The biggest shareholder is Brookfield Asset Management Inc. which owns around 49% of the outstanding shares.

Looking at past history, it looks like the company paid dividends between 1991 and 1993 and then stopped them. They were restarted in 1997. They increased their dividend every year until 2008. Since 2008 the dividends have remained flat. The main reason I can see is that their Dividend Payout Ratios were too high. This was especially true of DPR for cash flow.

The DRPs for 2012 financial year was 24.9% for earnings and 46.6% for cash flow. These ratios are expected to be higher for 2013 at 49% for earnings and 59% for cash flow. Earnings are expected to go down a lot (49%) in 2013 and cash flow to go up a lot (31%) in 2013. However, the third quarterly results are in and if you look at the last 12 months to September 30, 2013, earnings have gone down slightly (1.3%) and cash flows gone down a lot (20%).

Until 2006 the EPS/CF Ratio was below 1.00. Since 2006, this ratio has been above 1.00 except for 2009. This is not a good sign. Healthy companies tend to have this ratio under 1.00. That is they have EPS lower than CFPS. Because the dividends are currently paid in US$, it means that for Canadian shareholders, the dividends will fluctuate with the US$-CDN$ exchange rates.

Return on Equity was rather low for this company until 2006 when it broke above 10%. It has been above 10% ever since with the current 5 year median ROE at 11.1%. As of the 3rd quarter of 2013, the ROE comprehensive income is almost 9% higher than the ROE on net income. This is good.

The Liquidity Ratio has been very low and the current ratio is just 0.39. This means that the current assets cannot cover the current liabilities. The Debt Ratio is quite good at 1.89. The current Leverage and Debt/Equity Ratios are at 2.12 and 1.12, respectively and are normal for a real estate company.

When I look at analysts' recommendations, I find Buy, Hold, Underperform and Sell recommendations. Most of the recommendations are a Hold and the consensus recommendation would be a Hold. The 12 months stock price consensus is $19.20 and this implies a negative total return with 2.94% from dividends and a capital loss of 3.37%.

When I look at Price/Earnings Ratios, I find a very big difference between the 5 year median ratios and the 10 year median ratios. The former ratios are less half of the later. The 5 year low, median and high median P/E Ratios are 4.66, 6.91 and 8.17. The 10 year low, median and high median P/E Ratios are 10.30, 14.03 and 17.77. The 5 year median P/E Ratios are quite low, but maybe this reflects the lack of dividend increases because of earnings and cash flow problems.

The current P/E Ratio is on the high side of both of these at 16.69 based on a stock price of $19.87 and 2013 earnings estimates of 1.14. If you use the 12 months EPS to the end of September 2013, the P/E Ratio is much lower at 8.57.

If you test using the Graham price, which is currently at $24.25, the price is good as the Price/Graham Price Ratio is current at 0.82. It is below 1.00. The 10 year low, median and high median P/GP Ratios are 0.74, 0.97 and 1.21. So the stock price is low to reasonable on a relative basis also. The 10 year Price/Book Value per Share Ratio is 1.85 and the current P/B Ratio is 0.91. A stock is cheap when this ratio is below 1.00 and the current one is also some 49% of the 10 year ratio.

However, if you look at the dividend yield, the current dividend yield at 2.93% is some 17% lower than the 5 year median dividend yield of 3.57%. On this basis the stock is getting expensive. It is considered expensive when the current dividend yield is 20% higher than the 5 year median dividend yield.

There is an article in October 2013 in the G&M on this stock which says that the company will report stable funds from operations and operating income in the third quarter of 2013. An article in Seeking Alpha says this company is out-of-favor and undervalued. According to The Motley Fool Brookfield Property Partners LP (TSX-BPY.UN) will acquire the 49% of this company it does not already own. The company's stock went up because of this. This should happen in the early part of 2014.

Not a dividend growth company anymore, so I am not interested in this stock. It also looks like it might soon be bought out, so is not a long term buy. See my spreadsheet at bpo.htm.

Brookfield Properties is a leading North American commercial real estate company that invests in premier-quality office properties in high-growth markets driven by financial service, government, and energy tenants. The portfolio is composed of office properties in 12 top U.S. and Canadian markets. Its web site is here Brookfield Office Properties.

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.

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