The Dividend Champions Watchlist: On Our Radar

By • April 11, 2017 • Dividend Watch List

In the December issue, we announced that the strong performance of the Dividend Champions Portfolio had prompted us to discontinue the Legacy Portfolio. This will also simplify stock selection for subscribers since all of our current recommendations are now represented by a single portfolio.

However, we know that many subscribers still hold some of the stocks from the Legacy Portfolio. As such, we’ll continue to monitor those former holdings that meet our stringent Dividend Champions criteria, as well as a few others whose coverage has specifically been requested by subscribers.

These names are now included in the Dividend Champions Watchlist. If there are other former recommendations that you would like to have monitored, please let us know by posting a comment to the “Stock Talk” page.

The criteria that we use to select the Dividend Champions are explained below. We apply the same criteria to the companies that we track on the Dividend Champions Watchlist and provide a Quality Score that ranges from 0 to 5 (with 5 being the best). The Quality Score indicates the likelihood that a company can sustain and grow its dividend over time.

  1. A track record of consistent and growing dividend payments: Does the company have a track record of consistent and growing dividend payments over time? We look for a company that has been paying dividends for at least five years, but preferably much longer.
  2. A rock-solid balance sheet: Does the company carry high levels of debt that could constrain future dividend payments? Generally speaking, we look for companies with a debt-to-capital ratio of less than 50% and with interest coverage of more than three times.
  3. A payout ratio that leaves room for unforeseen events: We prefer companies whose dividend obligations are manageable, thus allowing them to sustain their payouts when times get tough. Here, the cyclicality of a company’s business is an important consideration. Beyond that, we look for companies whose payout ratios are less than 70% of free cash flow (operating cash flow minus maintenance capital expenditures).
  4. Prospects to grow the dividend faster than the rate of inflation: A company that is unable to grow its dividend faster than the rate of inflation for an extended period is unlikely to provide an acceptable total return.
  5. An attractive starting dividend yield and a reasonable valuation: Apart from the dividend yield, we are also looking for a reasonable valuation based on metrics appropriate for the business. In the present environment, that means we’re looking for companies whose stocks yield 2.5% to 5% and whose payouts are projected to grow 5% to 10% annually.

With these criteria in mind, our Dividend Champions Watchlist shows the stocks that we’re monitoring for potential inclusion in the Dividend Champions Portfolio.

Stock Talk

Comments Guidelines
Frank Tintinalli

Frank Tintinalli

Please add to the Champions Watch List my portfolio stock Enercare Inc. that’s in the legacy portfolio.
Frank Tintinalli, Thanks

Ari Charney

Ari Charney

Hi Frank,

We’ll add that one to the Watch List–thanks for the suggestion.

Best regards,
Ari

Frank

Frank Solcan

Hello Ari/Deon,

Do you think PPL overpaid for VSN?

Thanks,

Frank

Ari Charney

Ari Charney

Hi Frank,

In reviewing the multiples for similar deals over the past year, it looks like PPL paid a fair price for VSN.

For instance, the average transaction value to EBITDA ratio for North American midstream acquisitions since the beginning of 2016 is around 12.4 times. The forward multiple for the PPL/VSN tie-up is around 12.1 times.

Similarly, the transaction value to book value for comparable deals has been around 3.0 times, which is about the same as the multiple for this deal.

Beyond that, the offer is a 22.5% premium to VSN’s Friday close, which seems reasonable compared to other premiums we’ve seen.

The decline in Pembina’s share price following the announcement seems due to the typical merger-arbitrage activity that acquirers usually experience.

Best regards,
Ari

Jeff

Jeff

A&W was recommended in an e-mail today. The AWRRF shares are apparently gray market – not even on the pink sheets. Although Fidelity lists a quote, there is no bid or ask price and the stock is thinly traded. How safe is buying such an issue.

Ari Charney

Ari Charney

Hi Jeff,

A&W is not a new recommendation, but an existing recommendation that Deon added to the portfolio last October. I was merely providing an update on its latest quarterly results.

As you may have observed with other recommendations in this service, the U.S. listing can sometimes be thinly traded, even if the stock has adequate liquidity in its home market. That’s certainly the case for A&W.

In these instances, the safest approach would be to buy the stock on the TSX–or stay on the sidelines if you don’t have access to that exchange.

If you’re still interested in the U.S. listing, then you would want to use limits to enter and exit the stock, while making sure to keep your position size small enough so that it does not exceed more than a single day’s average trading volume.

Best regards,
Ari

Jeff

Jeff

Forgot to ask: Is AWRRF subject to Canadian withholding for U.S. investors?

Ari Charney

Ari Charney

Hi Jeff,

I’m assuming that there would be the usual withholding, but this entity is organized as an income fund, not a corporation, so the rules may be somewhat different. I’ll contact investor relations to see if they know what the tax implications would be from a U.S. investor’s standpoint.

Best regards,
Ari

Jeff

Jeff

What do you think of the prospects for Enercare? The price recently dropped because of a .03 loss in the last quarter which was mostly a result of one time charges and seasonality issues. Revenue is up and appears to be sustainable. Although the Watch List reports yield at 5%, it seems that it should be 6% going forward at that price.

Ari Charney

Ari Charney

Hi Jeff,

From a long-term perspective, it’s hard not to be skeptical about a company that, in the digital age, still derives the vast majority of EBITDA from water-heater rentals. I mean water heaters aren’t all that expensive and they generally last a very long time.

Personally, I’ve never rented a water heater and don’t know of anyone who does. It’s always conveyed with the property, and the cost of any repairs has always been manageable.

But the fact that this company remains a going concern is due to its early dominance of the Ontario market. In fact, it created the market. The business was launched by Enbridge Gas Distribution back in the 1950s as a way to encourage customers to switch to natural gas and drive year-round demand for it.

Presently, there’s still enough of a market in Ontario for water-heater rentals to support EnerCare (with 1.1 million customers there) plus a few competitors.

Growth in the market is dependent upon the construction of new homes, so Canada’s housing bubble could be a risk.

Given the inherent limitations of the Ontario water-heater market, last year EnerCare acquired Service Experts, an HVAC services and repair company, for US$341 million. The deal should diversify the company’s earnings both operationally and geographically.

But, as you noted, a warmer-than-average winter actually caused Service Experts to be a drag on earnings during the first quarter. Prior to the earnings announcement, EnerCare’s stock had risen sharply over the trailing year. And with a P/E of 36.1, it was arguably priced for perfection. So a correction following disappointing earnings was certainly not unwarranted.

To mitigate some of the risk of seasonality, management is having Service Experts market similar rental programs in its territories in order to start generating recurring revenue.

Looking ahead, analysts expect earnings per share will decline by 1% on an adjusted basis for full-year 2017, but forecast an 18% rise in earnings for 2018.

At current levels, the forward yield is around 5.3%.

Best regards,
Ari

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