Topic: Dividend Stocks
CP’s five offspring give you wider choice
When Canadian Pacific broke itself up into five separate companies this year, it gave investors an opportunity to fine-tune their investments. PANCANADIAN ENERGY $40 (Toronto symbol PCE; SI Rating: Average), formerly PanCanadian Petroleum, was already one of our favourites. We also like these four new companies. But some are better choices for your portfolio than others.
You need to consider their SI Ratings (they range from Above-average to Extra risk) and sector (Fording belongs in Resources; the others are in Manufacturing & Industry.) You also need to consider your other holdings, to avoid unwanted concentration in any one business.
CANADIAN PACIFIC RAILWAY LTD. $31 (Toronto symbol CP; SI Rating: Above average) operates a 14,000-mile railroad network that connects the main business centres of Canada and the U.S. Midwest and Northeast. Alliances with other railroads extend its reach to Mexico.
Revenues between 1996 and 2000 hovered around $3.6 billion. Per-share profits jumped from $2.18 in 1996 to $2.98 in 1997, but fell to $2.29 in 1999. Profits climbed to $2.33 a share in 1999, and to $2.54 a share in 2000, mainly due to cost cuts. The company cut its expenses by 17% since 1996; it plans a further 10% cut by 2004. CP Rail is now one of the most profitable railways in North America.
In the nine months ended September 30, 2001, profits climbed 8.0% to $1.89 a share from $1.75 a share a year earlier. When you remove special income tax benefits and charges related to the spin-off, profits for the latest period fell to $1.59 a share. Revenues were unchanged at $2.7 billion.
Gains in coal and domestic container shipments offset drops in forest products and international traffic. CP Rail’s operating ratio, a key measure of a railway’s productivity, grew to 78.9% from 77.5% a year earlier. CP Rail should gain from higher use of rail, especially by companies shipping goods across the Canada-U.S. border. Heightened security at border crossings has slowed truck traffic and it takes much less time to inspect rail freight.
CP Rail’s debt at September 30 was 1.2 times equity. That’s up from 0.6 times at the end of 2000, due to debt assumed as part of the spin-off. The company has plenty of cash flow to handle the debt. The stock now trades at 13.5 times the $2.30 it will likely earn in 2001, excluding unusual charges. The $0.56 a share dividend yields 1.8%.
Canadian Pacific Railway is a buy.
CP SHIPS LTD. $17 (Toronto symbol TEU; SI Rating: Average) in based in London, England and operates a fleet of 84 container ships in four main regions: TransAtlantic; Australia; Latin America; and Asia. More than 80% of its revenues come from North American imports and exports.
CP Ships’ revenues more than doubled from $816.6 million in 1996 to $2.6 billion in 2000 (all amounts except share price in U.S. dollars), mainly due to acquisitions. Profits climbed 42.7%, from $0.96 a share in 1996 to $1.37 a share in 1998. Earnings fell to $0.76 a share in 1999, mainly due to a 14% drop in average freight rates, but jumped to $1.71 a share in 2000.
In the first nine months of 2001, profits fell 48.7% to $0.60 a share from $1.17 a share a year earlier, mostly due to restructuring charges and costs related to the spin-off. Revenues were roughly unchanged at $1.9 billion.
The TransAtlantic market accounts for just over half of CP Ships’ revenues and gross profits, and the company has a 25% share of this market. This is mainly due to its large port facilities in Montreal, the furthest inland port in North America. This lets the company carry goods further on ships, and cut down on more costly overland transportation.
In 2000, capital expenditures on ships, containers and other items jumped to $5.82 a share from $2.08 a share in 1999. The company plans to raise the number of ships in its fleet that it owns from 30% to 70%. It leases its other ships under long-term charters. Capital spending in 2001 should fall to $3.14 a share now that the conversion is nearly over.
The company’s balance sheet is very strong. It has $1.49 a share in cash, while long-term debt is only 0.2 times equity. The stock trades at only 8.0 times the $1.34 that the company is likely to earn in 2001. It also trades at only 1.5 times its tangible book value of $7.14 a share. CP Ships has yet to declare its first dividend, but it does plan to pay a quarterly dividend of $0.04 U.S. a share. That would yield 1.5%.
CP Ships is a buy.
FORDING INC. $27 (Toronto symbol FDG; SI Rating: Extra risk) is one of the world’s top producers of metallurgical coal with mines in BC and Alberta. It mainly sells to Asian steel mills, but it also supplies thermal coal to electrical power stations. Coal supplied 94% of year 2000 revenues. Fording is also the world’s largest producer of the industrial metals wollastonite (used in plastics and ceramics), and tripoli (used in abrasives).
Revenues rose from $915.0 million in 1996 to $1.0 billion in 1997, but fell to $855.6 million in 1999 due to a 25% drop in coal prices. Revenues crept up to $896.1 million as prices improved. Per-share profits climbed from $2.08 in 1996 to $2.79 in 1997, but fell steadily to $0.51 in 1999. Profits rose 23.5% in 2000 to $0.63 a share. Cash flow per share fell from $2.79 in 1998 to $1.91 in 1999, but grew to $2.27 in 2000.
In the nine months ended September 30, 2001, a 13% jump in coal prices combined with a 5% rise in sales volume pushed profits to $1.26 a share from $0.39 a share a year earlier. Cash flow also rose sharply, to $2.33 a share from $1.51 a share, while revenues grew 15.9%, to $765.5 million from $660.7 million.
Capital expenditures fell from $1.30 a share in 1998 to $0.75 a share in 2000, as most of Fording’s mines need only sustaining funds. This frees up cash for other uses, including debt payments and dividends. Long-term debt is only 0.1 times equity, and the company will probably be debt free by the end of 2002.
The stock now trades at 15.0 times its likely earnings of $1.80 a share in 2001. The $0.50 dividend yields 1.9%.
Fording’s coal reserves should last for 25 years, and new excavation technologies could double this estimate. Coal use by electrical plants is also rising as new scrubbing equipment significantly cuts harmful emissions. Fording’s reliance on foreign steel makers adds to its risk. But its high-quality reserves and low-cost operations give it an edge against competitors.
Fording is a buy for aggressive investors.
FAIRMONT HOTELS & RESORTS INC. $35 (Toronto symbol FHR; SI Rating: Average) owns and operates 77 luxury hotels in North America. It also manages 37 hotels, and is an investor in 55 hotel and resort properties. Fairmont also owns Delta Hotels, a chain of 40 business class hotels.
Fairmont’s revenues rose 56.2%, from $340.0 million in 1998 to $530.9 million in 2000, mostly due to acquisitions (all amounts except share price in U.S. dollars). Likewise, profits jumped from $0.63 a share in 1998 to $1.07 a share in 2000.
Growing by acquisition can be risky, but Fairmont’s strategy is to buy underperforming hotel properties in key North American cities and resort destinations. It then transforms them into more profitable luxury hotels, which can raise profit margins.
In 2001, the company bought a resort in Hawaii, and raised its stake in two resorts in Barbados to 100%. It also took full control of its resort in Whistler, BC.
In the first nine months of 2001, the company lost $1.05 a share from ongoing operations compared with a profit of $0.73 a share a year earlier. The loss was mainly due to expenses related to the CP break-up. Revenues climbed 6.4%, to $441.8 million from $415.4 million.
Average revenues per room fell 45% in the wake of the September 11 terrorist attacks, but are now only 15% below pre-attack levels. Lingering travel fears will cut Fairmont’s profits in the fourth quarter, which is typically its weakest time of year. But most of Fairmont’s hotels are in Canada, so the sharp drop in U.S. air travel has had limited impact on its business so far.
The company has $196.4 million in cash and only $148.7 million in long-term debt. The stock now trades at 22.2 times the $1.00 (U.S.) a share it will probably earn in 2001. That’s expensive, but reasonable considering its high quality properties. Fairmont’s strong balance sheet should help it during the current slowdown. It may even pick up some new properties at bargain prices.
The company reports earnings in U.S. funds, but it plans to pay an annual dividend of $0.05 Cdn. a share starting in 2002. That would yield 0.1%.
Fairmont is a buy.