Morneau Shepell Inc.

I do not own this stock of Morneau Shepell Inc. (TSX-MSI, OTC- MSIXF). Every once in a while I go through the stocks that my brokerage, TD Waterhouse, is recommending to find promising new stocks. In February 2013 this stock was rated a buy by TD Waterhouse. It was under Diversified Financials.

This company used to be an income trust, but it changed to a corporation and cut its dividend by 17% in 2011. The dividends have remained flat since then. When this stock was first issued as an income trust in 2005, there was some dividend increases.

The problem with this stock is that the Dividend Payout Ratios are too high. For 2013 the DPR for EPS was at 371% for the CFPS it was at 60%. It is expected that the DPR for EPS will be around 96% in 2014 and the DPR for CFPS will be around 74%. If it can grow its dividend in the future, it might be an interesting stock for a dividend portfolio.

Shares have done quite well since that stock was issued in 2005. The 5 and 10 year total return is at 18.69% and 11.62% per year. The portion of this return attributable to capital gains is at 11.76% and 5.52% per year. The portion of this return attributable to dividends is at 6.93% and 6.10% per year. Dividend return will be lower in the future. The current dividend yield is now at 4.56%.

Outstanding share have increased by 3% and 7% per year over the past 5 and 8 years. The shares have increased due to share issues and stock options. There has been good growth in Revenue, and moderate growth in Earnings and Cash Flow.

Revenue per Share has grown at 10% and 10.1% per year over the past 5 and 8 years. EPS has grown at 3% per year if you look at 5 year running averages over the past 4 years. EPS has grown at 10% per year over the past 8 years. Cash Flow per Share has grown at 3% and 23% per year over the past 5 and 8 years. Growth in CFPS is more over the past 4 years if you look at 5 year running average which shows growth at 6.5% per year.

One problem is Return on Equity which for 2013 was just 3.2%. The 5 year median ROE is also low at 5%. The ROE on Comprehensive Income is similar with corresponding rates at 3.7% and 5.7%.

Generally debt ratios are good but the Leverage Debt/Equity Ratios are a little high. Liquidity Ratios for 2013 were at 1.83. The Debt Ratio for 2013 was at 1.87. These are both quite good. The Leverage Debt/Equity Ratios are at 2.15 and 1.15 for 2013.

The 5 year low, median and high median Price/Earnings per Share Ratios are 24.70, 27.52 and 30.35. The 8 year P/E Ratios are similar. I think that these are quite high for this sort of company. The current P/E Ratio is 21.14 based on a stock price of $17.12 and 2014 EPS estimate of $0.81. However, this stock price test shows that the stock price is relatively cheap. On an absolute basis, a P/E of 21.14 is a reasonable one.

The 10 year median Price/Book Value per Share Ratio is 1.50. The current P/B Ratio is 2.52 based on a stock price of $17.12 and Book Value per Share of $6.79. The current P/B Ratio is some 68% higher than the 10 year median P/B Ratio and this stock price test suggest that the stock price is relatively expensive.

I get a Graham Price of $11.12 and the 10 year low, median and high median Price/Graham Price Ratios are 1.20, 1.41 and 1.57. The current P/GP Ratio is 1.54. This stock price test suggests that the stock price is relatively reasonable. However I think that the P/GP Ratios are rather high.

The analysts' recommendations are Buy and Hold. The consensus recommendation is a Hold. The 12 month stock price is $17.30. This implies a total return of 5.61% with 4.56% from dividends and 1.05% from capital gains.

For me to be interested in this stock I would like to see growth in dividends and a better ROE. See my spreadsheet at msi.htm.

I will have only one entry for this stock as I must do on some stock because I cover too many stocks to do double entries on all that I follow.

Morneau Shepell Inc. 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. The company has business in Canada and US. Its web site is here Morneau Shepell.

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. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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