In fiscal 2014, Richelieu Hardware (TSX─RCH) earned record profits for the fifth year in a row. It’s expected to earn record profits again in fiscal 2015 (fiscal years end November 30). This ‘dividend aristocrat’ has raised its dividend. It also rewards its shareholders with share buybacks. This distributor, importer and manufacturer of specialty hardware and complementary products remains a buy for long-term gains and modest, but rising, dividends.
In fiscal 2014, Richelieu earned $52.4 million, or $2.63 share. This was up by 18.5 per cent from $46.4 million, or $2.22 a share, the year before. Earnings per share rose more than total earnings. That’s because the company spent $30.4 million to buy back 667,600 shares. This exceeded the 187,825 shares issued under stock options. The share count fell by a net 479,775. Richelieu’s return on shareholders’ equity rose by 1.3 percentage points, to 17.5 per cent.
Fiscal 2014—a fifth year of record profits
President and chief executive officer Richard Lord says: “Our growth, innovation and market penetration strategies and the synergies created with our acquisitions enabled us to achieve very good results in 2014. We were also very proud to see our market capitalization exceed $1 billion.” (The ‘market cap’ is the number of shares multiplied by the share price).
In fiscal 2014, Richelieu generated sales of $647 million. This was up by 10.2 per cent from $587 million, the year before. The company’s internal growth reached 7.1 per cent. Five acquisitions added 3.1 per cent to the sales growth (see below). Sales to manufacturers climbed by 11.1 per cent, to $551 million. Sales to hardware retailers and renovation superstores went up by a more modest 5.7 per cent, to $96 million. Sales in Canada rose by 7.1 per cent, to $471 million. Sales in the U.S. converted to Canadian dollars jumped by 19.7 per cent, to $176 million.
All of Richelieu’s regular operating costs as a group rose by 10.1 per cent, to $576 million. This was marginally lower than the growth of sales. Income tax increased by only 6.6 per cent, to $18 million. As a result, the company’s earnings went up.
The better earnings are confirmed by a 9.1 per cent advance of the cash flow, to $60.3 million. Even better, the cash flow exceeded dividend payments of $11 million, acquisitions of $9.9 million and capital investment of $5.5 million. Even after net share buybacks of $26.4 million, the company’s excess cash flow came to $7.4 million. One plus is that total investment of $15.4 million more than offset amortization of $7.1 million—Richelieu keeps growing.
Excess cash flow has given Richelieu an excellent balance sheet. Its cash of $33.7 million greatly exceeds total debt of $5.4 million. The company uses its cash to reward you. Richelieu has just raised its dividend 7.1 per cent, to 60 cents a share.
Richelieu’s five acquisitions generate sales of $27 million a year. In fiscal 2015, these acquisitions will contribute for a full year. We expect the company to earn $2.90 a share in fiscal 2015. The shares trade at a high forward price-to-earnings ratio of 20.2 times. This looks justified by the consistent earnings growth.
Richelieu is a consolidator
Richelieu Hardware is consolidating its industry. That is, it’s buying up competitors. In fiscal 2014, the company paid $9.9 million to acquire five companies.
Of these acquisitions, three were in Canada and two in the U.S. Richelieu operates 36 distribution centres in Canada and 28 in the U.S. In Canada, it also manufactures veneer sheets, edge-banding, components for the window and door industry plus decorative moldings.
Given Richelieu’s excess cash flow and excellent balance sheet, we expect it make more acquisitions and continue to consolidate the industry in fiscal 2015. By improving the product mix and raising the margins of these acquisitions, the company can build its profitability.
Richelieu Hardware is a buy for long-term share price gains and modest, but rising, dividends.
The Investment Reporter, MPL Communications Inc.
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