Dividend Analysis - Saputo Inc (TSE:SAP)
13 May 2008Looking for a good Canadian dividend paying company? A good place to start looking is the S&P/TSX Canadian Dividend Aristocrats. Reader Luciano has been thinking of investing in a member of that list: Saputo Inc.
Let’s have a look and see if this company belongs in our portfolio of superior dividend yielding stocks!
Company Profile:
From Reuters:
Saputo Inc. is a dairy processor. The dairy products sector includes the production and distribution of cheeses and fluid milk, mainly in Canada, Argentina and the United States. The grocery products sector consists of the production and marketing of snack cakes, tarts and cereal bars. The Company’s dairy products sector includes Canadian and Other Dairy Products Sector and US Dairy Products Sector. Saputo’s dairy products are available in three segments of the food market: retail, foodservice and industrial.
Market capitalization is $5.40B.
Company Fundamentals:
As usual, let’s see how management has performed by looking at the return on invested capital (ROIC). Looking at the last 5 years, management has very consistently delivered an ROIC in the 12%-14% range. The 5 year average ROIC is 13.10%.
The return on equity (ROE) figures bear this out. The 10 year average ROE is 15.94% and the 5 year average ROE is 16.46%. The 5 year is slightly lower but incredibly consistent over that timeframe.
Equity growth rate has most definitely been trending ever downwards. The 9 year average equity growth rate is a very nice 16.13%. The 5 year rate drops to 11.16%. The 3 year rate sees a further drop to 9.58% and last year’s equity growth rate remained consistent at 9.75%. Still decent growth but the downward trend is not as appealing.
Earning per share growth rate shows a much steeper decline. In fact, in 2006, there was a decline of 11.93%! Even with that, that 9 year EPS growth rate comes in at 17.47%. The 5 year rate plummets to 6.88%. The 3 year rate gets decimated to 0.68%. But last year’s EPS growth rate came in at a healthy 16.15%! More investigation into what occurred in 2006 is definitely warranted here. Interestingly enough, the equity growth rate in 2006 came in at 7.02%. A little on the low side, but not completely out of character.
Sales growth rates have been on the decline from the 9 year rate of 16.12% down to the 5 year rate of 3.84%. The 3 year sales growth rate also came in at 3.84%. And last year’s rate showed a decrease of 0.53%. Sales growth rates declined in 2000, 2003 and 2007. But they have always seemed to rebound for a few years.
All in all, I am concerned with the downtrend in all the fundamental numbers. To me it implies that future dividend growth rates will follow suit. Let’s have a look at the dividend fundamentals.
Dividend Fundamentals:
The current dividend yield is 1.88%. That is considerably below the 2.51% dividend yield of the TSX Composite index. So I would consider this a below average dividend payer.
Now, the dividend growth rate over the last 10 years has been absolutely fantastic! Just over the last 5 years, the average dividend growth rate has been a whopping 28.44%! But, just like the fundamentals, the rate has been slipping. The 3 year rate slides down to 19.43%. And last year’s dividend growth rate comes in at 13.04%. Excellent growth rates all around, but the trend is disconcerting.
The dividend payout ratio has been consistently increasing from a mere 5.17% back in 1997 to the current 34.98%. Still a fairly conservative payout ratio with room to increase.
Cash flow growth rates mimic the EPS growth rates. In 2006, there was a decrease of 6.04%. So that of course brings down many of the averages. The 9 year rate is 15.79%. The 5 year rate plummets to 5.13%. The 3 year rate comes in at a mere 1.54%. But last year’s rate rebounded to a very healthy 12.63%.
Dividend growth rate is still solid (even if decreasing) and the payout ratio is fairly conservative.
Valuation Models:
Time to put a price on this company. Let’s use our 3 models to determine a fair price to pay for Saputo Inc.
The average high dividend yield model takes into account the dividend yields over the last 5 and 10 years. In this case, the 10 year average high dividend yield is 1.47% while the 5 year average high dividend yield is 2.05%. The current yield is sitting in between these two values at 1.88%. If I demand the 5 year average high dividend yield of 2.05%, then my model price works out to $23.40. At the current price of $25.59, I would have to pay a premium of 9.35% for this stock.
Benjamin Graham would not be as generous as me! The Graham number works out to $14.96 or a premium of 71.08% over the current price. Ouch.
Using the discounted present value model, I used the following inputs:
- future EPS growth rate of 11.16% (determined from the 5 year equity growth rate)
- future P/E of 16.38 (the 5 year average P/E)
- dividend yield of 2.05%
- future dividend growth rate of 13.04% (Although this is the lowest of the growth rates, it may be too high considering the declining fundamentals)
With this information, my model price works out to $21.94 (or a premium of 16.64%). Definitely more in line with the average high dividend yield model.
Here is my dividend analysis of SAP.
Here is the 1 year stock price chart:
Conclusion:
The stock has definitely been a dividend performer. The dividend growth rates have been amazing. However, with this great growth, the dividend yield itself has remained relatively low in comparison to other dividend yielding stocks. And that is fine, as long as you can continue to get this superior dividend growth.
However, I am concerned with the declining fundamentals which of course translate into lower dividend growth rates. Even with that, the dividend growth rate is still excellent.
All the model prices show that the stock is currently overpriced. I would definitely wait for a pullback and would be looking at around the $22 price range.
Would I consider this for inclusion in our portfolio of superior dividend yielding stocks? No. With the expectation of slowing dividend growth, I would want a higher dividend yield than is currently available.
Full Disclosure: I do not own shares in SAP.
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on May 14th, 2008 at 6:10 am
Welcome back. I missed you. I thought something may have happened to you as before you took your hiatus you spoke of seeking a more healthful lifestyle.
on May 14th, 2008 at 6:14 am
Welcome back. You were missed!
Best Wishes,
D4L
on May 14th, 2008 at 9:16 am
Thankyou very much!
on May 14th, 2008 at 1:31 pm
Welcome back Dividends Matter!
Best Regards,
Dividend Growth Investor
on May 15th, 2008 at 12:34 pm
I’m biased because this is one of my core holdings, but I think when assessing their fundamentals you have to take into consideration the amount of acquisition they’ve participated in over the past 5 years and look towards their forward earnings growth once those have been properly integrated. They have excellent management, great focus on being involved in global sales and their costs have increased. The stock isn’t as cheap as when I bought it in early 2007, but it has its place in a dividend portfolio to help balance out the heavy weights of CDN financials.
on May 16th, 2008 at 9:54 pm
Hi Nurseb911,
I admit that their growth has been stellar and of course that accounts for the massive dividend growth that has been experienced.
But from my analysis, I am concerned that the growth is slowing down. If so, then so will the dividend growth. At that point, investors will demand a higher yield.
For me, the 1.88% is too low. And even if it gets to the 5 year average high dividend yield of 2.05%, I am not sure that would be high enough either.
on May 17th, 2008 at 1:23 am
DM:
Welcome back, you were missed.
Haven’t looked at this company so I can’t comment…
RickT
on May 19th, 2008 at 9:33 am
Canadian dairy is fairly protected as well. There are a lot of Milk Marketing Boards and co-ops so its again a safer play because of that.
on May 26th, 2008 at 1:39 am
Saputo’s numbers look good, and I’ve watched them before, but for some reason I don’t feel I’m a foods investor. I like construction and the energy industries.
Also, because of my health values, I don’t think I’d like to invest in cheese. But this is pretty contrarian of me; I wouldn’t expect many others to think the same way:)