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.
When I was updating my spreadsheet, I noticed that Long Term Debt is rising fast. It increased by 108.37% in 2018, by 25.66% in 2019 and by 24.61% in the first quarter of 2020. Goodwill and intangibles increased by 90% in 2018. They seemed to have done well in the first quarter on EPS, but almost all the earnings are because of a divestiture of a business. Insider bought when the stock went below $28 in March. However, there was some insider selling recently at $33.00.
Outstanding shares are increasing at 6.8% and 3.4% per year over the past 5 and 10 years. They are giving out a lot of stock options. Stock Options have increased the outstanding shares by 0.70% on average each year for the past 5 years. You would expect this to be at 0.50% or less. Return on Equity is low at 3.1% in 2019 with 5 year average at 5.5%.
Another problem I see in the Return on Equity (ROE). This has been very low. The highest it ever reached at 9.6%, but it has often been below 3%. For the last two years it has been below 4% and the 5 year median ROE is just 5.45%.
The dividend yields are moderate with dividend growth non-existent. The current dividend yield is moderate (2% to 4% ranges) at 2.48%. The 5 and 10 year median dividend yields are also moderate at 3.81% and 4.91%. The historical dividend yield is good (5% to 6% ranges) at 5.60%. This company started as a income trust. Income trusts tend to have quite high dividend yields. This is the reason for this historical median being high.
Shortly after this company listed as an Income Trust, the rules were changed and this company had to become a corporation. It had a few increases as an income trust, but became a corporation in 2011 and decrease the dividend by around 16%. However, as a corporation, the company needed to cover the dividends by earnings. It looks like this it will finally do this in 2020. So, since 2012, the dividend has been flat. They cannot do dividend increases until they can cover the dividends by earnings. Whether or not it will become a dividend growth company now is not certain, but a possibility.
The Dividend Payout Ratios (DPR) still need improvement. The DPR for EPS for 2019 is 279% with 5 year coverage at 188%. These ratios are far too high. The DPR for CFPS for 2019 is 39% with 5 year coverage at 42%. This coverage is good if 40% or less. The DPR for Free Cash Flow for 2019 is 128% with 5 year coverage at 109%. These are too high also.
Debt Ratios are currently fine. The Long Term Debt/Market Cap Ratio for 2019 is 0.21. Debt is increasing but the current ratio is still good at 0.27. The Liquidity Ratio for 2019 is 1.19 and if you add in Cash Flow after dividends, it is just 1.25. The 5 year median is better at 1.66. The Debt Ratio is fine at 1.68. The Leverage and Debt/Equity Ratios are fine at 2.47 and 1.47.
The Total Return per year is shown below for years of 5 to 15 to the end of 2019. Under the Capital Gain column is the portion of the Total Return attributable to capital gains. Under the Dividend column is the portion of the Total Return attributable to dividends. See chart below.
| From | Years | Div. Gth | Tot Ret | Cap Gain | Div. |
|---|---|---|---|---|---|
| 2014 | 5 | 0.00% | 17.62% | 14.10% | 3.52% |
| 2009 | 10 | -0.62% | 18.44% | 13.15% | 5.29% |
| 2004 | 15 | -0.44% | 13.26% | 8.46% | 4.80% |
The 5 year low, median, and high median Price/Earnings per Share Ratios are 42.50, 48.53 and 54.76. The corresponding 10 year ratios are 27.78, 33.84 and 38.90. The corresponding 10 year ratios are 27.88, 34.66 and 37.88. The current P/E Ratio is 24.70, based on a stock price of $31.51 and 2020 EPS estimate of $1.15. This stock price testing suggests that the stock price is relatively cheap.
I get a Graham Price of $16.22. The 10 year low, median, and high median Price/Graham Price Ratios are 1.76, 2.04 and 2.34. The current P/.GP Ratio is 1.94 based on a stock price of $31.51. This stock price testing suggests that the stock price is relatively reasonable and below the median.
I get a 10 year median Price/Book Value per Share Ratio of 2.44. The current P/B Ratio is 3.10 based on a Book Value of $708M, Book Value per Share of $10.17 and a stock price of $31.51. The current P/B Ratio is 27% above the 10 year median ratio. This stock price testing suggests that the stock price is relatively expensive.
I get a 10 year median Price/Cash Flow per Share Ratio of 14.82. The current P/CF Ratio is 28.65 based on CFPS 2020 estimate of $1.10, Cash Flow of $76.5M and a stock price of $31.51. The current ratio is 93% above the 10 year median ratio. This stock price testing suggests that the stock price is relatively expensive.
I get an historical median dividend yield of 5.60. The current dividend yield is 2.48% based on dividends of $0.78 and a stock price of $31.51. The current dividend yield is 56% below the historical median dividend yield. This stock price testing suggests that the stock price is relatively expensive.
I get a 10 year median dividend yield of 4.91. The current dividend yield is 2.48% based on dividends of $0.78 and a stock price of $31.51. The current dividend yield is 50% below the 10 year median dividend yield. This stock price testing suggests that the stock price is relatively expensive.
The 10 year median Price/Sales (Revenue) Ratio is 1.42. The current P/S Ratio is 2.23 based on 2020 Revenue estimate of $983M, Revenue per Share of $14.13 and a stock price of $31.51. The current ratio is 57% above the 10 year median ratio. This stock price testing suggests that the stock price is relatively expensive.
Results of stock price testing is that the stock price is probably relatively expensive. The dividend yield tests show the stock price is relatively expensive and this is confirmed by the P/S Ratio test. There is nothing wrong with these tests. Although one could argue there is a problem with the dividend yield tests because of the flat dividends. The P/B Ratio test says the stock price is relatively expensive and there is nothing wrong with this test.
The P/E Ratio test has a problem as there is a big hike expected in the EPS, but the hike in the EPS for the first quarter is due to a special event. This problem would also affect the P/GP Ratio test. The P/CP Ratio tests is using an older 2020 CFPS estimate, so this could possibly be suspect.
Is it a good company at a reasonable price? First this stock would seem to be relatively expensive. I cannot recommend this stock as a dividend growth stock as dividends are flat. I cannot recommend it as a dividend stock because they cannot cover their dividends, have a very low ROE, give out lots of stock options and recently been diluting the shares by selling more shares. Investors looking for capital gain might find this attractive if the price was lower.
When I look at analysts’ recommendations, I find Strong Buy (1), Buy (2) and Hold (1). The consensus would be a Buy. The 12 month consensus stock price is $36.75. This implies a total return of 19.11% with 16.63% from capital gains and 2.48% from dividends.
The most recent entry is in 2019 and the analyst on Stock Chase feels this is a solid slow-growth company. Aditya Raghunath on Motley Fool currently likes this company. A writer on Simply Wall Street talks about recent earnings not being as good as they first appear because of stock dilution and special items. A Writer on Simply Wall Street says this company has unfortunate characteristics that would lead to sub-optimal outcome for dividend investors.. Paul Sywulych of Morneau, Shepell talks on FinTech Magazine on how his companies works.
Morneau Shepell is a human resources company that provides consulting and administrative services in four segments: well-being, administrative outsourcing, consulting, and absence management. The company generates most of its revenue in the United States and Canada. Its web site is here Morneau Shepell Inc.
The last stock I wrote about was about was Suncor Energy Inc (TSX-SU, NYSE-SU) ... learn more. The next stock I will write about will be Inter Pipeline Ltd (TSX-IPL, OTC-IPPLF) ... learn more on Friday, July 10, 2020 around 5 pm. Tomorrow on my other blog I will write about Evergreen Gavekal.... learn more on Thursday, July 09, 2020 around 5 pm.
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