Dividend Analysis - Leons Furniture Company (TSE:LNF)
21 September 2007Dividends Matter reader Rick did such a great job finding Canadian National Railway Company, that I thought I would share his other stock request with you right now - Leons Furniture Company which trades on the TSE under the symbol LNF.
Has Rick found another potential member of our portfolio of superior dividend yielding stocks? Let’s find out!
Company Profile:
Leon’s Furniture Company sells home furnishings, appliances and electronics through a chain of retail facilities and franchises located throughout Canada.
Market capitalization is $ 905M.
Company Fundamentals:
Let’s start with a look at management. The return on invested capital has been increasing over the last 10 years. From an ROIC of 14.2% in 1997, the ROIC has slowly increased to its current 18.6%. The 5 year average ROIC is 17.8%.
Return on equity has been incredibly consistent. The 10 year average ROE is 16.46% while the 5 year average ROE is 16.86%. Management has done a very good job maintaining this ROE for a 10 year period.
Equity growth rate has remained very consistent as well. The 9 year rate is 8.83%. The 5 year rate dips to 7.77%. The 3 year rate bounces back to 8.4% and last year’s equity growth rate was 10.33%.
Earnings per share growth rate has also been incredibly stable although it has begun to drop off. The 9 year rate is 10.63%. The 5 year rate stays steady at 10.24%. The 3 year rate climbs to 12.92% before dropping off to 8.59% last year. Even in 2005, the EPS growth rate was 8.31% which is significantly lower than the earlier years.
Interestingly enough, sales growth rates have actually increased. The 9 year rate is 6.91%. The 5 year rate stays steady at 6.9%. The 3 year rate jumps to 8.97% and drops back a bit to 7.95% last year.
Fundamentals look solid and consistent which is what I like to see in a dividend payer.
Dividend Fundamentals:
Current dividend yield is 2.16%. I consider that below average considering that the S&P/TSX Composite Index delivers a dividend yield of 2.46%. In these cases, I would expect some excellent dividend growth rates to compensate for the below average yield.
And unfortunately, the one area that Leon’s is not consistent in seems to be its dividend growth rate. It has literally been all over the map! From massive increases of 145% in 1 year to decreases of 62.69% in another year. There doesn’t seem to be any rhyme or reason to the changes in growth rate from year to year. In my opinion, this is a huge negative. I really have no idea what they are going to do next year!
Over the 10 year period, the dividend growth rate looks great. The 9 year rate is 11.39%. The 5 year rate jumps to 20.04%. The 3 year rate doubles to 40.13%. And last year’s dividend growth rate was 87.5%. Yes, these averaged numbers do look very appealing once you smooth out the peaks and valleys.
The dividend payout ratio has also been all over the map. From a high dividend payout ratio of 68.37% to a low of 20.99%. Last year’s dividend payout ratio was 52.97%. Definitely on the high side of this range.
Cash flow growth rate has been consistent but on a decline. The 9 year rate is 11.28%. The 5 year stays steady at 11.24%. The 3 year rate climbs slightly to 12.27% and last year’s cash flow growth rate was 7.56%.
Valuation Models:
Let’s use our 3 valuation models to come up with a fair price for this stock.
Using our average high dividend yield model, I will look at the historical high dividend yields that have been achieved. Investors have been pretty consistent in the highest dividend yield that they will allow. The 10 year average high dividend yield is 3.25%. The 5 year average high dividend yield is 3.12%. If we demand the 5 year yield, then the model price is $8.97. At the current price of $12.95, Mr. Market is demanding a premium of 44.3%!
Would Benjamin Graham agree? Calculating the Graham number, I come up with $8.20 or a 57.93% premium. So Mr. Graham would be in agreement.
For my discounted present value model, I used the following inputs:
- future EPS growth rate of 7.77% (Derived from the 5 year equity growth rate that was observed.)
- future PE of 14.27 (This is the 10 year average PE and is lower than the current PE of 17.56.)
- dividend yield of 3.12%
- future dividend growth rate of 11.39% (I took this from the 9 year dividend growth rate. But this has been so erratic that it is very difficult to estimate.)
From this information, the model price works out to $8.82 and a premium of 46.87%.
Here is my dividend analysis of LNF.
Here is the 1 year stock price chart:
Leon’s has definitely come off its high back in May.
Conclusion:
Everything was looking good until we got to the erratic dividend growth rate. For me, that is a deal breaker. I found it interesting that all 3 valuation models pegged the stock at approximately a 45% premium. Even if you like this stock, I would say it is just too expensive.
I will not be adding LNF to the portfolio of superior dividend yielding stocks.
Full Disclosure: I do not own shares in LNF.
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on September 29th, 2007 at 1:42 am
Average Joe:
Good point about the erratic growth. Some strengths of the company are that it owns the real estate its stores sit on, lack of debt, and that only 2 analysist follow it. Then again there’s those commercials…