Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

This past week, an Inner Circle member asked about one of the Canadian dividend stocks that was an income fund before the trust tax of 2011. This company raises revenue in a variety of ways, including the franchising of its company-owned gas stations, which allows it to collect commissions without high overhead.

Q: Pat: Can I have your advice on Parkland Fuel? Thank you.

A: Parkland Fuel Corp., (symbol PKI on Toronto: www.parkland.ca), operates gas stations, convenience stores and a fuel distribution business, mostly in western Canada and Ontario.

The company was called Parkland Income Fund prior to its conversion to a dividend-paying corporation on December 31, 2010.

Parkland owns 163 rural gas stations and convenience stores. Its brands include Fas Gas Plus, Race Trac Gas and Short Stop (convenience stores). Many stations sell propane in addition to gasoline and diesel fuel. The company also operates Esso gas stations in western Canada and Ontario under a licensing deal with Imperial Oil Ltd. (symbol IMO on Toronto).

Parkland continues to sell its company-owned stations to franchisees. This lets it collect commissions on fuel sales and rent without having to staff and operate the stations.

The company also sells fuel to 576 independent gas stations and commercial customers. As well, the company is spending $21 million to convert its Bowden oil storage tanks near Red Deer, Alberta, into a more profitable distribution terminal. The Bowden facility will hold 200,000 barrels when it begins operating in late 2012.

Parkland continues to expand by acquisition. In January 2010, it paid $228.4 million for Bluewave Energy Limited Partnership, which is Canada’s largest distributor of fuels under the Shell brand.

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New acquisitions add home heating and fuel distribution businesses

In January 2011, Parkland paid $24.0 million for Island Petroleum Ltd., which distributes home heating oil in Prince Edward Island. In June 2011, it bought Cango Inc., which distributes fuel to 155 Ontario gas stations, for $20.0 million.

In August 2011, Parkland sold its long-haul trucking business for $25.2 million. This division hauled fuels from refineries and terminals to Parkland’s gas stations and other operations. Parkland now uses outside carriers.

In the three months ended March 31, 2012, Parkland’s revenue rose 11.4% to $1.1 billion from $955.1 million a year earlier. Recent acquisitions pushed up fuel volumes by 3.9%. As well, higher oil prices increased the selling price per litre by 8%.

Parkland uses hedging contracts to lock in fuel prices. The company lost $4.2 million on these agreements during the quarter, but its earnings still rose 7.4%, to $17.5 million from $16.3 million. However, earnings per share fell 7.1%, to $0.26 from $0.28, on more shares outstanding.

Parkland’s long-term debt of $336.7 million is a manageable 37% of its market cap. It also holds cash of $53.8 million, or $0.82 a share.

The company pays monthly dividends of $0.085 a share. The annual rate of $1.02 yields a high 7.4%.

In the most recent Inner Circle Q&A, Pat looks at the added risk of Parkland’s growth-by-acquisition strategy in a highly competitive market, and balances that against the higher profit margins the company earns in less competitive rural markets. He concludes with his clear buy-hold-sell advice on the stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE

When you own dividend stocks, do you watch the company closely to ensure that it is in a position to maintain the dividend, or possibly increase it? Have you had any major disappointments from stocks whose dividends seemed safe, but were cut? Let us know what you think in the comments section below. Click here.