Buy Contrans Group for capital gains, high and rising dividends

Founded in 1985, Contrans Group (TSX-CSS) has grown by acquiring specialized transportation companies. It owns independently-operated trucking companies in van, flatbed, waste, tank, dump and logistics, and provides these transportation operators with financial, infrastructure, information and technology resources.

The Investment Reporter rates Contrans Group a buy for long-term share price gains as well as high and rising dividends.

In the three months to March 31, Contrans earned $5.7 million, or 17 cents a share, from continuing operations. This was up by nearly 40 per cent from $4 million, or 12 cents a share, a year earlier. It achieved the higher earnings despite worse weather in this year’s first quarter.

Contrans’ earnings per share have risen each year since 2010. This year, it’s expected to earn 98 cents a share. That’s profit growth of nearly 14 per cent from earnings of 86 cents a share last year. Next year, the company is expected to earn $1.12 a share. That’s earnings growth of 14.3 per cent.

Based on this year’s estimate, Contrans’ shares trade at a price-to-earnings, or P/E, ratio of 14.3 times. This is attractively low given the earnings per share growth. In fact, its MGI (Marpep Growth Index) of 1.1 suggests the shares are undervalued. Based on next year’s estimate, Contrans trades at an even better P/E ratio of only 12.8 times. This results in a more appealing MGI of 1.3.

Contrans has raised its dividend each year since 2010, when it paid 24 cents a share. It has just raised its dividend again, to 60 cents a share—up by 25 per cent from 48 cents a share. The company’s dividend yields an attractive 4.2 per cent. That’s high, but not too high. We expect Contrans to keep raising its dividend.

One reason that we expect the dividend to keep rising is that Contrans has a safe net-debt-to-cash-flow ratio of only 1.5 times. This is within our standard comfort zone of two times or less. We also expect its net debt to remain low for a couple of reasons.

First, Contrans sold its Waste Collection segment for about $72 million. Chairman and chief executive officer Stan Dunford says it would be “difficult for Contrans to achieve additional accretive growth of any significance in the waste industry”. As a result, “Management has concluded that it would be in the best interests of Contrans’ shareholders to sell the company’s waste collection segment and to focus on enhancing its core business of freight transportation.”

Second, Contrans’ cash flow exceeded its needs. In the first quarter, it generated cash flow of $20.5 million. This easily surpassed net capital spending of $2.1 million and dividend payments of $4.2 million. Last year’s cash flow also exceeded the company’s needs. Excess cash flow means the company can finance itself internally without borrowing money.

A plus about Contrans is that management owns 18.2 per cent of the shares. Mr. Dunford, in particular, owns 15.4 per cent of the shares. This means that he has what’s known as ‘skin in the game’. It’s in Mr. Dunford’s interest that the shareholders of Contrans do well. That is, his interest is similar to yours.



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

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