Manufacturing stock’s cash flow should boost dividend

CAE Inc. provides advanced simulation and controls equipment and integrated training solutions for the civil aviation and military markets. CAE is the world’s leading supplier of civil flight simulators, one of the largest independent civil aviation training providers, and a major defence contractor. Few Canadian manufacturing companies stocks receive the “Conservative” quality rating we assign to CAE.

World class manufacturer CAE Inc. (TSX─CAE) designs and makes aircraft simulators for training pilots. It also provides related training in both civil and military markets. The company earned modestly more in the fiscal year ended March 31, 2015. In fiscal 2016, it’s expected to earn record profits. That would give CAE the cash it needs to continue to raise your dividends. The shares remain a buy for long-term price gains and modest, but increasing, dividends.

Solid fiscal year for this world class manufacturing stock

In fiscal 2015, CAE earned $204 million, or 76 cents a share, from continuing operations in both periods. This was up by 5.6 per cent from $189 million, or 72 cents a share, the year before. Earnings per share rose less than overall earnings. That’s because the company issued 1,309,418 shares for $12.6 million.

President and chief executive officer Marc Parent said, “I’m pleased with fourth quarter and fiscal year performance overall, having met most of our strategic and financial milestones.”

In fiscal 2015, CAE generated an 8.1 per cent rise in revenue, to a record $2.246 billion. Its Civil Aviation Training business produced a 10 per cent increase in revenue, to $1.295 billion. That’s nearly 58 per cent of the company’s total revenue.

The Defence and Security business generated only a 4.3 per cent rise in revenue, to $857 million (38 per cent of revenue). CAE notes, however, that this division did better despite “a down defence market.”

CAE’s Healthcare business revenue jumped by 19.1 per cent, to $94.3 million. But since it accounts for only four per cent of total revenue, the healthcare business was too small to have much of an impact.

Operating profit outpaces revenue

The operating profits of all three of CAE’s segments grew faster than the revenue. That is, operating profit margins (operating profit as a percentage of revenue) increased.

CAE has also built up a record backlog of $5.357 billion. That’s up by $352 million from a year earlier. The backlog could grow further. In the latest quarter, the company’s new orders exceeded its sales.

Strong and rising cash flow

In fiscal 2015, CAE’s cash flow advanced by 14 per cent, to $338 million. This confirms its higher earnings. What’s more, the cash flow exceeded total investment of $179 million and dividend payments of $46.3 million.

Lightens debt load

CAE used part of its excess cash flow to repay debt. Its net debt-to-cash-flow is heading down towards our comfort zone of two times or less. Also, the company should generate even more cash flow this year. It writes, “With the majority of investments now complete to develop our global training centre footprint, capital expenditures are expected to be lower again in fiscal 2016 at approximately $100 million.”

Dividend aristocrat among manufacturing stocks

CAE is a “dividend aristocrat”. That’s because it has raised its dividend every year since 2007, when it paid four cents a share. The current dividend of 28 cents a share is up seven-fold. While it now yields a modest 1.9 per cent, we expect its dividend to keep rising in the years ahead.

Mr. Parent is upbeat about CAE’s outlook. He said, “We look forward to more success in fiscal year 2015 and we are encouraged by the long term growth potential for CAE with its industry leading training solutions.”

In fiscal 2016, CAE is expected to earn a record 84 cents a share. Next year, it’s expected to set new record earnings of 95 cents a share.

Among manufacturing companies stocks, CAE remains a buy for further long-term share price gains and fair, but rising, dividends.

 

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