Transcontinental Inc.’s shares remain in the bargain basement stocks section and are a buy for long-term price gains as well as high and rising dividends. Transcontinental is a ‘dividend aristocrat’ and its shares trade at an attractively-low price-to-earnings ratio. Its price-to-cash-flow ratio is also appealingly low.
Transcontinental Inc. (TSX─TCL.A) is Canada’s largest commercial printer. It’s a dividend aristocrat that has raised its dividend for many years. Transcontinental is a buy for long-term share price gains as well as its attractive and rising dividends.
It’s likely cheap because investors are wary of commercial printers in the Internet age. But Transcontinental is one printer that’s doing fairly well.
Seldom will value investors find this quality among the best bargain stocks to buy now.
Blue chip quality among bargain basement stocks
We have, in fact, recently raised Transcontinental’s quality rating by one notch, to ‘Very Conservative’. Our quality rating system uses a two-stage process to assess investment quality and risk, from a long-term viewpoint. We base our stage one, or initial, quality rating on asset size. After all, a big company can survive a longer, deeper slump than a small one and is more likely to get government help.
Adjusted asset size counts for a lot
At its October 31, 2014, year-end Transcontinental’s assets totaled $2.028 billion. So it qualifies for a stage-one rating of ‘Very Conservative’. But we exclude goodwill in calculating a company’s asset level. Transcontinental’s goodwill came to $420 million. Subtract this and its adjusted assets fall to $1.608 billion. As a result, the company remains qualified for an adjusted stage-one quality rating of ‘Very Conservative’.
In the second stage, we analyze a company’s economic sector, capital structure, long-term prospects and so on. We look at its profit history and pay particular attention to how it did in past economic setbacks. In this second stage we may raise or lower our initial rating by a notch (in rare cases, two or even more). When a company loses money for two years in a row, we take an especially close look and consider a deeper cut in the rating—all the way down to ‘Speculative’, if that seems justified.
Business sector also affects quality rating
We often stick with our initial rating of companies in the consumer sector. We may raise the first-stage rating of a company in finance or utilities. We’ll often lower the initial rating of a company in the resource or manufacturing sectors. They’re vulnerable to unpredictable shifts in demand.
Transcontinental is in the consumer sector. As a result, it sticks to its stage-one quality rating of ‘Very Conservative’. That’s up by one notch from its former rating.
Finding a diamond amongst the zircons
We’ve always acknowledged that ours is not a perfect system, and that well-hidden risks will occasionally escape our notice, if only temporarily. Or, to put it more bluntly, nobody gets it right every time. But our system provides you with a framework for sound investing—for building a portfolio that exposes you to only those risks you choose to accept.
In Transcontinental’s case, it helps you discover blue chip quality among the bargain basement stocks.
The Investment Reporter, MPL Communications Inc.
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