Serving clients whose revenues rise and fall with commodity prices has not kept this stock from raising its dividend four times in the past five years.
This heavy equipment dealer benefits from exclusive distribution rights in several key regions. It has also gained from cost-cutting and efficiency plans. And in the most recent quarter, rising commodity prices helped boost its revenues and earnings.
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FINNING INTERNATIONAL INC. (Toronto symbol FTT; www.finning.com) began operating in 1933 and is now the world’s largest seller of Caterpillar-brand heavy equipment, such as bulldozers and tractors.
The company is the exclusive Caterpillar dealer in three regions: Western Canada (B.C., Alberta, Saskatchewan, Yukon, Northwest Territories and parts of Nunavut) supplied 50% of the company’s revenue in 2016; South America (Argentina, Chile, Uruguay and Bolivia) contributed 33%; while the U.K. and Ireland provided 17%.
Finning mainly sells its products to cyclical companies in the oil, mining and construction industries. As a result, its revenue and earnings fluctuate with the prices for those underlying commodities.
Despite that uncertainty, Finning has paid dividends continuously since 1970. It has also raised that payout four times in the past five years.
These increases are possible because the company was able to generate a total of $1.6 billion in free cash flow between 2013 and 2016 despite weaker commodity prices.
The company last increased its quarterly payment in September 2017. Investors now receive $0.19 a share, up 4.1% from $0.1825. The new annual rate of $0.76 yields 2.5%.
Finning’s revenue rose 4.5%, from $6.6 billion in 2012 to $6.9 billion in 2014. Due to lower oil and metal prices, revenue declined to $6.2 billion in 2015, and fell again to $5.6 billion in 2016.
Earnings dropped from $1.96 a share (or a total of $337.6 million) in 2012 to $1.84 a share (or $318.2 million) in 2014.
Mining Stocks: Shares up 15% since the start of the year
In response to weaker commodity prices, Finning has consolidated facilities and cut jobs. As a result of severance and related costs, it lost $0.94 a share (or $161.0 million) in 2015. Its earnings then recovered to $0.38 a share (or $65.0 million) in 2016. If you exclude all unusual items, Finning’s earnings fell 31.8%, from $1.29 a share in 2015 to $0.88 in 2016.
In the quarter ended September 30, 2017, the company’s revenue gained 16.1%, to $1.55 billion from $1.33 billion a year earlier. The higher revenue is mainly because rising prices for oil and other commodities have spurred demand for Finning’s products and services.
In addition to the higher revenue, the company’s restructuring plan continues to pay off: earnings in the quarter jumped 59.1%, to $0.35 a share (or a total of $59 million) from $0.22 a share (or $36 million).
The company’s balance sheet is sound. Finning ended the latest quarter with cash of $516 million, or $2.91 a share. Its long-term debt was $1.3 billion, or a moderate 25% of its market cap.
The stock has jumped 15% since the start of 2017. It now trades at 22.6 times the company’s projected 2017 earnings of $1.33 a share. Earnings could reach $1.55 a share in 2018, and the stock trades at a more reasonable 19.4 times that forecast.
The improving earnings will also help support the company’s dividend. For all of 2017, Finning will probably generate free cash flow (cash flow less capital expenditures) of $150 million. Dividends will account for a high, but still sustainable, 88% of that.
Recommendation in TSI Dividend Advisor: Finning is a buy.
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The link finning.com does not work. Does not take you to Finning.
Fixed. Thanks, Maurice.
I have made a lot of money over the years by covered calls. The only risk is giving up any increase in share value over the call price.