Pat McKeough recently replied to an Inner Circle member looking for an opinion on Morneau Shepell Inc., Canada’s largest human resources consultant, with global operations. The stock has a high dividend yield, but recent acquisitions carry risk, says Pat.
Q: Hi Pat: Just wondering what your opinion is of Morneau Shepell Inc.? Thank you.
A: MORNEAU SHEPELL INC. (symbol MSI on Toronto; www.morneaushepell.com) is the largest Canadian firm providing human resource consulting and outsourcing services. The company aims to help employers manage pensions and benefits, health and disability programs, and workplace training and education.
Morneau Shepell has 4,000 employees in offices across North America. It offers services to over 20,000 organizations in Canada, the U.S. and worldwide.
Before its conversion from an income trust on January 2011, the company operated under the name Morneau Sobeco Income Fund.
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As an industry leader, Morneau Shepell has expanded rapidly in the past few years by purchasing related businesses. As a result, its revenue jumped 55.4%, from $365.0 million in 2011 to $567.3 million in 2015.
However, writedowns and the cost of merging new businesses cut its earnings, from $0.51 a share in 2011 to $0.21 a share in 2013. Earnings improved to $0.51 a share in 2014, but then fell to $0.33 a share in 2015.
In the three months ended June 30, 2016, Morneau Shepell’s revenue rose 4.8%, to $149.3 million from $142.4 million a year earlier. However, earnings fell to $8.1 million, or $0.16 a share, from $9.3 million, or $0.19 a share.
The company’s long-term debt of $262.0 million (as of June 30, 2016) is a manageable 27% of its market cap. However, due to an aggressive growth-by-acquisition strategy, its goodwill and intangible assets now total $545.0 million, or a high 55% of its market cap.
The stock is up 39% since the start of 2016. It now trades at 23.6 times this year’s forecast earnings of $0.78 a share. Morneau Shepell pays a monthly dividend of $0.065 a share, for a yearly yield of 4.2%.
The company’s growth by acquisition adds risk. However, it continues to win lots of new contracts, most of which generate recurring revenue. For example, it recently signed a large, multiyear contract with the State of Illinois. Morneau Shepell will administer a comprehensive range of benefits for over 300,000 state employees. Right now, it has submitted bids for at least seven other contracts in the U.S. They are also focused on health and benefits administration and comparable in size to the Illinois deal.
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This is the same company founded by finance minister Bill Morneau. Hopefully his background with retirement funds will help him in his current job.