Manufacturers expose you to volatility

Manufacturing stocks can get hurt by unexpected factors such as the COVID-19 pandemic. And their dividends are less secure than those paid by utilities and financial stocks.

manufacturing_stocks

Manufacturing stocks have been hurt by the global COVID-19 pandemic. Many have had to cut or reduce their dividends.

We often point out that manufacturing stocks and resources stocks are volatile. Financial stocks and utility stocks are more stable. Consumer stocks are in between in terms of volatility.

This shows up in terms of dividend payments. Since we published our April 3 Investment Planning Guide, all of our Key financial stocks and utilities stocks have continued to pay their dividends. Most of the dividend cuts occurred in the manufacturing and resources sectors.

Manufacturers’ dividends are less secure

Manufacturer and Montreal-based CAE Inc. (TSX—CAE), for instance, eliminated its dividend. It no longer pays 44 cents a share. But the shares remain a buy for a long-term price recovery.

Fellow Montreal-based manufacturing stock Dorel Industries (TSX—DII.B) experienced setbacks and eliminated its dividend. Dorel remains a hold.

Also Montreal-based, manufacturing stock Richelieu Hardware (TSX—RCH) will not pay its latest quarterly dividend. It remains a hold.

AG Growth cuts dividend; reduces frequency

Winnipeg-based AG Growth International (TSX—AFN) has reduced its dividend by three-quarters, to 60 cents a share. The farm machinery and equipment manufacturing stock will now pay quarterly instead of monthly dividends.

Ag Growth International writes, “the dividend reduction is appropriate to facilitate cash conservation, leverage reduction, and a stronger balance sheet in these highly uncertain times. . . . Recent days have confirmed our core infrastructure strategy as our operations have been captured as essential services, providing us with relatively unique right to operate in this environment.”

Ag Growth International described itself as a “leading provider of equipment solutions for agriculture bulk commodities including seed, fertilizer, grain, feed and food processing systems”. It has “manufacturing facilities in Canada, the United States, the United Kingdom, Brazil, France, Italy and India and distributes its product globally”. This diversification reduces the company’s risk.

Ag Growth International’s shares fell over 50 per cent since our November, 2019 issue, giving them downwards price momentum. On the positive side, it makes the shares relatively cheap. They trade at a reasonable multiple of what the company is expected to earn in 2020. The shares trade at an even better multiple of what it’s expected to earn next year. And while the company significantly reduced its dividend, the shares still yield a decent 2.8 per cent.

Ag Growth International remains a buy for decent dividends and a share price recovery.

BRP Inc. drops dividend but remains a buy

We regularly review Montreal area-based BRP Inc. (TSX—DOO). Since the end of November its shares have plunged giving them downwards price momentum. The company has eliminated its dividend.

The shares trade at 17.1 times the $1.50 they’re expected to earn in the year to January 31, 2021. Then again, they trade at a better 10.1 times the $2.53 a share they’re expected to earn next year. Also, the price-to-cash-flow ratio was only 3.4 times. That’s within the ratio of five times or less that can indicate a buy.

BRP’s shares trade far above their book value of negative $6.29 a share. But as it continues to make money, the book value will improve. The company can earn a lot as a going concern. It remains a buy for a share price recovery, provided that you need no dividends.

NFI Group reduces its dividend

We regularly review Winnipeg-based bus and coach manufacturing stock NFI Group (TSX—NFI). Since our November 29, 2019 issue, its shares have fallen substantially giving them downwards price momentum.

Management “has determined to temporarily reduce the Company’s quarterly dividend, for the period January 1 to March 31, 2020.” The quarterly dividend of $0.2125 a share is only half the former rate of $0.425 a share. President and chief executive officer Paul Soubry said “NFI is withdrawing the fiscal 2020 financial guidance we issued on March 12, 2020.”

We expect NFI to do well over time. It’s a leading independent bus manufacturer operating 50 facilities across 10 countries. As big cities keep on getting bigger, mass transit becomes a necessity. NFI remains a buy for a share price recovery and dividends that now yield almost six per cent.

This is an edited version of an article that was originally published for subscribers in the May 1, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

Comments are closed.