Canadian blue chip stock Stantec Inc. is a buy

Design and consulting firm Stantec Inc. is expected to earn more money this year and next. It’s using part of this growing income to raise its dividend. The shares of this Canadian blue chip stock remain a buy for further long-term share price gains and modest, but increasing, dividends.

Edmonton-based design and consulting company Stantec Inc., one of The Investment Reporter’s top Canadian stocks, is a buy for further long-term share price gains and modest, but rising dividends.

In the three months to March 31, Stantec earned $38 million, or 40 cents a share. This was up by 11.1 per cent from $33.5 million, or 36 cents a share, a year earlier.

President and chief executive officer Bob Gomes said, “With a solid business model—one that is able to capitalize in many different market cycles—and an expanded depth and reach of services, we continue to achieve solid performance, even when areas of our Company have been significantly impacted by lower commodity prices.” In fact, Stantec’s Energy & Resources business suffered in the first quarter. But this was more than offset by growth in its other businesses—especially its Buildings business.

Stantec is well diversified

Stantec has over 15,000 employees working in over 250 locations. It writes, “We collaborate across disciplines and industries to bring buildings, energy and resource, and infrastructure projects to life.” The company provides “professional consulting in planning, engineering, architecture, interior design, landscape architecture, surveying, environmental sciences, project management, and project economics”.

Stantec’s geographical diversification has also paid off in helping to maintain its position as one of the top Canadian stocks to own. In the first quarter, its Canadian and international business declined. But this was more than offset by strong growth in the U.S.

In the first quarter, for instance, Stantec won the planning, management and engineering work for a new 237,000 square foot interdisciplinary research laboratory at Yale University. It also won a contract to work on one of Florida’s interstate highways.

Two acquisitions and a healthy balance sheet

Stantec continues to diversify. In the first quarter, it completed two acquisitions. One was the Canadian engineering assets of Dessau Inc. The other was Sparling Inc. in Seattle. Stantec expects the acquisitions to “further strengthen the Company’s diversity of services and community reach”.

Despite these acquisitions, Stantec’s balance sheet remains healthy. Subtract cash of $27.4 million from total debt of $460 million and its net debt totals $432.6 million. Divide this by shareholders’ equity of $1.165 billion and you find the company’s net debt-to-equity ratio is 0.37 to one. That’s like a comfortably-low 37 cents of debt for every dollar of shareholders’ equity. We don’t use the debt-to-cash flow ratio in Stantec’s case because its cash-flow statement doesn’t follow standard practice.

Stantec first paid dividends in 2012. It has raised its dividend ever since. Its current dividend of 42 cents a share yields a modest 1.2 per cent. We expect the company to keep raising its dividend each year.

In 2015, Stantec is expected to earn $1.95 a share. Based on this estimate, the stock trades at a forward price-to-earnings, or P/E estimate of 18.3 times. Stantec is expected to earn a higher $2.23 next year. Based on this estimate, it trades at a better forward P/E ratio of 16.0 times. The long-term outlook for the company is favorable.

Top Canadian stocks will profit from infrastructure needs

North America needs infrastructure. Across Canada and the U.S. there’s a need for new roads, bridges, port facilities, airports, train tracks and so on.

What’s more, North America faces what’s known as an ‘infrastructure deficit’. That is, a lack of maintenance means that much of the existing aging infrastructure is deteriorating.

Governments and the private sector are going to need to invest a lot in infrastructure. Canadian blue chip stocks such as engineering companies Stantec Inc. and SNC-Lavalin Group stand to profit from the building of new infrastructure and the renewal of existing infrastructure.

Stantec Inc. (TSX─STN; NYSE─STN) is a buy for further long-term share price gains and modest, but increasing, dividends.

 

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

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