Buy CAE for capital gains and dividends

CAE Inc.’s shares have climbed in recent months. That’s because its sales and earnings per share have risen. Earnings-per-share growth is accelerating and its outlook is favorable. CAE remains a buy for long-term gains and modest, but rising dividends.

CAE (TSX─CAE; NYSE─CAE) is expected to earn 78 cents a share in the year to March 31. That would be up by 11.4 per cent from the 70 cents a share that it earned last year. This gives the stock a hefty forward price-to-earnings ratio of 20 times. Next year, however, its earnings are expected to rise by 14.1 per cent, to 89 cents a share. Based on this estimate, the company’s forward price-to-earnings ratio would be a high but more reasonable 17.5 times. It remains a buy for long-term gains and modest, but rising, dividends.

CAE’s earnings growth is accelerating

In the nine months to December 31, CAE earned $137 million, or 52 cents a share, from continuing operations. This was up by 6.1 per cent from $130 million, or 49 cents a share, a year earlier. All of the improvement occurred in the third quarter. In that quarter, the company earned $52 million, or 20 cents a share. This was up by 17.6 per cent from $47 million, or 17 cents a share, in last year’s third quarter.

In the first nine months, CAE’s revenue rose by 7.5 per cent, to $1.615 billion. What’s more, revenue was up in all three segments: Civil Simulation and Training; Defence and Security; and Healthcare.

All three segments contributed

President and chief executive officer Marc Parent commented on CAE’s third-quarter results. He said “In Civil we saw strong demand for simulators and continued airline outsourcing of training to CAE. In Defence, we received a range of orders on new and existing programs that demonstrate our platform diversity and geographic reach. And in Healthcare, we continued our success in penetrating global markets with orders including a large deal in Central Asia.” To bolster its Defence segment, CAE agreed to pay $19.8 million to acquire Bombardier’s Military Aviation Training business. It includes the NATO Flying Training in Canada program.

In the first nine months, CAE’s costs as a group were up by 6.3 per cent. Since this was up by less than the revenue, the company’s pre-tax income jumped by over 18 per cent. But its income taxes more than doubled. This reduced the growth in its total earnings and earnings per share.

In the first nine months, CAE’s cash flow jumped by 19.6 per cent, to $236.7 million. This confirms its higher pre-tax earnings. Even better, it exceeded net capital investment of $150.8 million and dividend payments of $34.3 million.

Subtract cash of $264 million from total debt of $1.235 billion and you get net debt of $971 million. This was 2.8 times the cash flow of $344 million over the latest four quarters.

CAE is a dividend aristocrat

CAE is a ‘dividend aristocrat’. It has raised its dividend every year since fiscal 2007, when it paid four cents a share. The current dividend of 28 cents a share is up seven-fold. But due to the rise in the share price, the dividend yields a modest 1.8 per cent. CAE issues a relatively small number of shares under stock option plans and stock dividends. But we prefer rising dividends to share buybacks.

Mr. Parent is optimistic about the company’s outlook. He said, “For CAE overall, third-quarter performance gives confidence to our outlook for a stronger second half of the fiscal year.”


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

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