Transcontinental Inc. is expected to earn more in the year to October 31. Its earnings are expected to slip a bit next year and the year after that. But as its earnings are far above its payout, we expect it to keep raising its dividends. It remains a ‘buy’.
We regularly review Montreal-based Key stock Transcontinental Inc. (TSX—TCL.A) on The Investment Reporter ’s weekly feature, ‘The Back Page’. Since we published our May 19 issue, its shares have risen by 8.8 per cent. This gives them upside price momentum. We continue to rate this blue chip stock a ‘buy’.
The company’s earnings are expected to slip a little next year and the year after that. Even so, the earnings remain far above the dividend and the company carries little debt. We expect Transcontinental to continue to raise its generous dividends. This should lead income-seeking investors to bid up the share price. It remains a buy for further long-term share price gains as well as attractive and growing dividends.
Transcontinental writes that it’s “Canada’s largest printer with operations in print, flexible packaging, publishing and digital media . . . has more than 7,000 employees in Canada and the United States, and revenues of C$2.0 billion in 2016.”
In the year to Halloween, we expect Transcontinental’s earnings to grow by 5.6 per cent, to $2.66 a share. Based on this estimate, it trades at an attractively-low price-to-earnings, or P/E, ratio of only 10.1 times.
Its earnings per share are expected to slip . . .
In fiscal 2018 (which begins November 1), Transcontinental’s earnings are expected to slip by 1.9 per cent, to $2.61 a share. Based on this estimate, its shares remain attractive with a P/E ratio of 10.2 times.
In fiscal 2019, Transcontinental’s earnings are expected to slip by 2.3 per cent, to $2.55 a share. Based on this estimate, the P/E ratio is still an appealing 10.5 times.
The lower expected earnings partly reflect shifts away from traditional newspapers. Some newspaper subscribers prefer to access electronic versions. This works against the number of copies that Transcontinental prints for traditional newspapers such as The Globe & Mail and the Toronto Star.
. . . but its dividend per share is expected to rise
Transcontinental is what’s known as a ‘dividend aristocrat’. In Canada that’s a company that has raised its dividend for at least five years in a row. Transcontinental has raised its dividends for more than five years in a row.
Transcontinental currently pays dividends of 80 cents a share. That yields an attractive three per cent. With the earnings remaining far above the dividends, we expect the company to continue to raise its dividends. That will give you a growing stream of dividends. At some point, income-seeking investors will find the yield too good to resist. They’ll likely bid up the share price. This will give you capital gains on top of high and growing dividend income.
Low debt gives it financial flexibility
Transcontinental has low debt. Its net debt-to-cash-flow ratio is only 0.5 times. This is well within our usual comfort zone of two times or less. This gives the company the financial flexibility to complete moderate acquisitions while continuing to raise its dividends. But acquisitions add to the risk.
And that is our one concern—Transcontinental’s acquisitions of packaging assets. This is not exactly its original printing business. When companies stray from their core businesses, it makes us nervous.
(Laidlaw, for instance, once made money busing students. It then acquired ambulances in California saying that it was an adjacent business. These acquisitions went disastrously wrong. We prefer it when companies stick to the what they know best.)
That one concern aside, we still rate this blue chip stock a buy for further long-term share price gains as well as attractive and growing dividends. Income-seeking investors will likely bid up the price of your shares.
This is an edited version of an article that was originally published for subscribers in the October 6, 2017, issue of The Investment Reporter . You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter .
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