Here's a good example of a stock that combines an attractive yield with a healthy price pullback.
WSP Global's stock price has pulled back over 11 per cent since peaking on May 15 to a valuation that is compelling. This mid-cap stock offers investors a potential double-digit price return over the next year, in addition to a nearly 4-per-cent dividend yield. This stock is a buy below $40.
WSP, with a market cap of $3.6-billion, provides professional services such as consulting and project management across a variety of segments, including transportation and municipal infrastructure, environmental remediation and building development. Revenues are diversified across sectors and geographies, with only 20 per cent of 2014 pro forma net revenues stemming from Canada.
Here are six reasons why investors should consider adding this stock to their diversified portfolios.
1. Solid operational results. The company's management has delivered strong operational results through organic and acquisition growth.
Given its solid backlog of more than $4.6-billion, this should translate into continued revenue growth.
Last month, at its annual meeting, management unveiled its 2015 to 2018 strategic plan and targets $6.0-billion in net revenues, 5 per cent annual net revenues organic growth and EBITDA margins north of 11 per cent. In 2014, WSP reported $4-billion pro forma combined net revenues.
2. New contract wins. The company has been successful in securing new contracts and just this month announced it had been awarded two major contracts involving the redevelopment of New York's LaGuardia Airport and California's high-speed rail program connecting San Francisco and Los Angeles.
3. Operational synergies realized. Management has estimated annual cost synergies of approximately $25-million (U.S.) arising from its 2014 transformational acquisition of infrastructure consulting firm Parsons Brinckerhoff. In the company's first-quarter, management's discussion and analysis report, management indicated that half of these synergies are expected to be realized by the end of 2015.
4. Acquisition growth. The balance sheet can support small tuck-in strategic acquisitions. Management is focused on expanding in the United States as well as expanding its global footprint. Larger acquisitions may resume in 2016, as the company's debt levels come down. The company currently has approximately 31,000 employees. Management targets having 45,000 employees by 2018.
5. Global economic recovery. Higher capital spending budgets by governments and businesses from strengthening economic conditions can develop into new projects and result in new contract wins for WSP.
6. The dividend. The company's quarterly payout is attractive at 37.5 cents (Canadian) a share, equating to a yield of 3.8 per cent. This dividend has been stable at this level since 2011.
Valuation
The stock is trading at 2016 EV/EBITDA multiple of 9.3 times, down from more than 10 times in May when the stock price peaked at nearly $45.
The current valuation is attractive given the company's growth profile. The three-year average multiple is 7.7 times; however, a higher multiple is now warranted given the company's expanded industry leadership, its larger global presence combined with an improving global economic outlook.
Chart watch
The stock price is nearing oversold levels. The relative strength index, a popular technical momentum indicator, is at 34; a reading at or below 30 generally indicates an oversold condition. The stock price experienced a parabolic move earlier this year, climbing over 41 per cent to $44.89 on May 15 from $31.78 on Jan 12. Year-to-date, the stock is up over 14 per cent after coming off sharply over the past month. There is technical support at $39 and at $37.75, near its 200-day moving average. Upside resistance is at $42, then $42.75, and $45.
Analysts' recommendations
There are nine "buy" recommendations and three "hold" recommendations. One-year target prices range from $45 to $51, with the average target price of $47.88, implying a potential gain of 20.2 per cent.
The bottom line
Buy the stock on a dip and wait for it to move higher. Meanwhile, investors are paid an attractive quarterly dividend.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.