Buy high tech stock CAE Inc. for gains and income

CAE is one of Canada’s few successful global technology stocks. It’s expected to earn more this year and next and to keep raising its dividend. CAE describes itself as a “global leader in the delivery of training for the civil aviation, defence and security, and healthcare markets.” CAE operates 160 sites and training locations in more than 35 countries.

Montreal-based CAE Inc. (TSX─CAE) earned more in the year to March 31 than the previous year. It’s expected to earn more this year and next. That and rising cash flow should maintain its reputation as a dividend aristocrat. This ‘national champion’ is one of Canada’s few successful tech stocks. It remains a stock to buy for long-term share price gains as well as decent and growing dividends.

In fiscal 2016, CAE earned $231 million, or 86 cents a share, excluding one-time items. This was up by 13.2 per cent from $201 million, or 76 cents a share the year before.

Its earnings per share grew less than net earnings. It repurchased 515,200 shares last year. This was, however, overwhelmed by the issuance of 3,246,946 shares, mostly under stock options and the company’s DRIP (or Dividend Re-Investment Plan).

On the positive side, the earnings per share beat Bay Street’s consensus estimate of 84 cents a share.

President and chief executive officer Marc Parent said: “Growth was led by our Civil segment, which saw higher demand for our training solutions translate into 76 per cent utilization of our training network and a 19.1 per cent operating [profit] margin this quarter.”

CAE currently pays a dividend of 30 cents a share. This is up seven-and-a-half-fold from the four cents a share that it paid in fiscal 2008. The company has raised its dividend for 11 years in a row. This makes it what’s known as a dividend aristocrat.

CAE should remain a dividend aristocrat

We expect CAE to keep increasing its dividend each year. For one thing, its rising earnings per share greatly surpass its dividends. For another, the company’s cash flow exceeds its needs. Last year’s cash flow of $348.9 million exceeded net capital spending of $167.2 million, acquisitions of $13.9 million and dividend payments of $56.7 million. Excess earnings and cash flow will enable CAE to raise its dividends.

Mr. Parent is optimistic about CAE. He said: “On the order front, I am pleased with the high level of activity in all segments, including an annual record 53 full-flight simulator orders in Civil, and annual orders exceeding revenue in Defense for [the] first time in four years. CAE’s market position and $6.4 billion [order] backlog bode well for long-term sustainable growth.”

In fiscal 2017 (which began April 1), we expect CAE to earn 95 cents a share. Based on this estimate, the shares trade at a price-to-earnings, or P/E, ratio, of 16.8 times. This seems reasonable for a company with earnings per share growth of 13.2 per cent and 10.5 per cent in fiscal 2015 and 2016, respectively.

Next year, we expect CAE’s earnings per share to increase to $1.05 a share. Based on this estimate, the shares trade at a better P/E ratio of 15.2 times. Again, this seems reasonable given CAE’s expected earnings per share growth of 10.5 per cent next year.

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