Is it a good company at a reasonable price? I think that this company is selling at a cheap rate. It could again become a dividend growth company, but it is a resource stock and has a history of cutting and increasing dividends. Resource stocks are cyclical stocks.
I do not own this stock of ARC Resources Ltd (TSX-ARX, OTC-AETUF). When TFSA first came out, this stock was recommended for this account as it was an income trust at that point and most of the distributions were taxable. This stock is no longer an income trust and the distributions are now dividends and taxed as normal Canadian dividends.
When I was updating my spreadsheet, I noticed the dividends, since hitting a bottom in 2020 are now up some 67% in two dividend increases, one in 2021 and one in 2022. This company used to be an income trusts, and as such could afford high dividends. When income trusts were forced to become corporations, they could not afford the same dividends. With dividend cuts and flat dividends, this company, since becoming a corporation in 2011, was not able to get their Dividend Payout Ratios for EPS at a good level. Going forward at the current level of dividends, the DPR for EPS looks doable.
If you had invested in this company in December 2011, $1004.00 you would have bought 40 shares at $25.10 per share. In December 2021, after 10 years you would have received $311.44 in dividends. The stock would be worth $460. Your total return would have been $771.44.
| Cost | Tot. Cost | Shares | Years | Dividends | Stock Val | Tot Ret |
|---|---|---|---|---|---|---|
| $25.10 | $1,004.00 | 40 | 10 | $311.44 | $460.00 | $771.44 |
The dividend yields are moderate with dividends currently increasing. The current dividend yield is moderate (2% to 4% ranges) at 2.62%. The 5 and 10 year median dividend yields are also moderate at 4.38% and 4.45%. The historical median dividend yield is high (7% and over) at 8.36%. This stock had high dividend yields when it was an Income Trust. A lot of income trusts are having a hard time adjusting their dividends to an appropriate level after become corporations.
Over the past 25 years this company has raised the dividends 8 times and decreased them 8 times. The company started as an Income Trust in 1996 and because a corporation in 2011 because of changing legislation. Dividends hit a low in 2020. In 2021 they increased the dividend by 10% and in 2022 they increased the dividend again and by 51%. So, they are probably back to being a dividend growth stock.
The Dividend Payout Ratios (DPR) are currently fine. The DPR for EPS for 2021 is 20% with 5 year coverage at 173%. The expected DPR for 2022 is 38%. The DPR for Cash Flow per Share for 2021 is 7% with 5 year coverage at 19%. The DPR for Free Cash Flow for 2021 is 14% with 5 year coverage at 76%. The DPR for 2022 is expected to be 28%.
Debt Ratios are fine. The Long Term Debt/Market Cap Ratio is 0.21 and is low and good. The Liquidity Ratio is low at 0.48. If you add in Cash Flow after dividends it is fine at 1.70. The Debt Ratio is 2.09 and is good. The Leverage and Debt/Equity Ratios are good at 1.92 and 0.92.
The Total Return per year is shown below for years of 5 to 25 to the end of 2021. 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. |
|---|---|---|---|---|---|
| 2016 | 5 | -18.87% | -10.52% | -13.03% | 2.51% |
| 2011 | 10 | -14.66% | -3.31% | -7.51% | 4.20% |
| 2006 | 15 | -14.09% | 2.55% | -4.32% | 6.87% |
| 2001 | 20 | -10.59% | 14.11% | -0.10% | 14.21% |
| 1996 | 25 | -7.26% | 12.49% | -0.44% | 12.93% |
The 5 year low, median, and high median Price/Earnings per Share Ratios are 4.73, 7.62 and 10.52. The corresponding 10 year ratios are 12.78, 18.14 and 23.49. The corresponding historical ratios are 10.41, 12.18 and 14.38. The current P/E Ratio is 7.15 based a stock price of $15.24 and EPS estimate for 2022 of $2.13. The current ratio is below the low of the 10 year median ratios. This stock price testing suggests that the stock price is relatively cheap.
I get a Graham Price of $20.24. The 10 year low, median, and high median Price/Graham Price Ratios are 1.10, 1.41 and 1.68. The current P/GP Ratio is 0.75 based on a stock price of $15.24. The current ratio is below the 10 year low median ratio. This stock price testing suggests that the stock price is relatively cheap.
I get a 10 year median Price/Book Value per Share Ratio of 1.89. The current ratio is 1.78 based a Book Value of $5,927.5M, Book Value per Share of $8.55 and a stock price of $15.24. The current ratio is 6% below the 10 year median ratio. This stock price testing suggests that the stock price is relatively reasonable and below the median.
I get a 10 year median Price/Cash Flow per Share Ratio of 8.85. The current P/CF Ratio is 3.26 based on Cash Flow per Share estimate for 2022 of $4.68, Cash Flow of $3,245.7M and a stock price of $15.24. The current ratio is 63% below the 10 year median ratio. This stock price testing suggests that the stock price is relatively cheap.
I get an historical median dividend yield of 8.36%. The current dividend yield is 2.62% based on a stock price of $15.24 and dividends of $0.40. The current ratio is 69% 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 4.45%. The current dividend yield is 2.62% based on a stock price of $15.24 and dividends of $0.40. The current ratio is 41% 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 4.56. The current P/S Ratio is 2.08 based on Revenue estimate for $5,093, Revenue per Share of $7.34 and a stock price of $15.24. The current ratio is 54% below the 10 year median ratio. This stock price testing suggests that the stock price is relatively cheap.
Results of stock price testing is that the stock price is probably cheap. First the dividend yield tests do not work well with old Income Trust stock and should be discounted. The P/S Ratio stock test is showing the stock as cheap as is most of the other tests.
When I look at analysts’ recommendations, I find Strong Buy (6), and Buy (9). The current consensus is a Strong Buy. The 12 month stock price of $19.93. This implies a total return of 33.40% with 30.77% from capital gains and 2.62% from dividends based on a stock price of $15.24.
When I looked at analysts’ recommendations last year, I found Strong Buy (6), Buy (8) and Hold (1). The consensus would be a Buy. The 12 month stock price consensus is $10.72. This implies a total return of 34.98% with 32.03% from capital gains and 2.96% from dividends based on a stock price of $8.12. What happened is a stock move to $15.24, which was a total return of 90.64% with 87.68% from capital gains and 2.96% from dividends based on a starting price of $8.12. So, they were not even close.
Last year I thought that the stock price was cheap, but I was not interested in it because it was not a dividend growth stock.
The analysts on Stock Chase quite like this company. Vishesh Raisinghani on Motley Fool thinks it is time to buy this company that had very solid fourth quarterly results for 2021. Robin Brown on Motley Fool thinks this company is currently cheap. A report for Simply Wall Street on Yahoo Finance thinks that oil will push beyond $100 and this company will benefit. Canadian Press published on CBC merger of ARC and Seven Generations Energy Ltd.
ARC Resources is an independent energy company engaged in the acquisition, exploration, development, and production of conventional oil and natural gas in Western Canada. The company produces light, medium, and heavy crude, condensate, natural gas liquids, and natural gas. Its web site is here ARC Resources Ltd.
The last stock I wrote about was about was Choice Properties REIT (TSX-CHP.UN, OTC-PPRQF) ... learn more. The next stock I will write about will be Russel Metals Inc (TSX-RUS, OTC-RUSMF) ... learn more on Monday, February 28, 2022 around 5 pm.
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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