Bill Morneau's week of uncharacteristic bad publicity over his financial ties to Morneau Shepell Inc. must have tormented the respected Finance Minister. How else to explain his decision to divest his shares in the company?
But the bad press has also raised the profile of the company he once helmed, and investors should be delighted: This stock deserves more attention.
Morneau Shepell, a human-resources consultancy, hasn't generated a lot of interest or even analyst coverage prior to this week, despite its market valuation of more than $1-billion. HR firms are like that.
This low profile is now on the rise, though, and no wonder.
The revelation that Mr. Morneau may have owned 2.2 million shares in the company, but did not put them into a blind trust when he became Finance Minister in 2015, raised questions about his judgment and whether his holdings could amount to a conflict of interest for a guy working on tax reform.
But the news coverage has also brought to light a revelation that even Liberal-bashing investors are sure to ponder: Mr. Morneau's shares would have generated a remarkable $143,000 in dividends – a month.
Move over, ethics. Let's take a closer look at this company.
It might not be the most interesting investment you can make. It works with about 20,000 organizations globally, generating hourly fees for HR consulting and working on longer-term contracts to provide things such as corporate health, benefit and retirement plans.
Snoozy stuff. But it works.
The company, founded in 1966 by Bill Morneau's dad as W.F. Morneau & Associates, generated revenue of more than $160-million in the second quarter ended June 30, up 7.7 per cent from last year. After taking into account acquisitions, revenue rose 7 per cent – not bad for HR.
Profit rose to $12.5-million, up $4.4-million. That's a 54-per-cent increase, but the measure of profitability that analysts are paying more attention to is EBITDA, or earnings before interest, taxes, depreciation and amortization: It increased 7.8 per cent during the quarter, to $31.8-million, after adjustments, beating expectations.
Stephanie Price, an analyst at CIBC World Markets, pointed out that the company's U.S. expansion is a particularly noteworthy achievement. Revenue from the region rose 17 per cent over last year.
"We see opportunities in both the U.S. government administration market (with governments looking to replace outdated software) and EAP [employee assistance program] markets," Ms. Price said in a recent note.
Concerns about the North American free-trade agreement raise some questions about this U.S. expansion. Nonetheless, Ms. Price raised her EBITDA estimate to $124-million this year, up nearly $2-million from a previous estimate, and pegged 2018 EBITDA growth at more than 8 per cent. She expects profit will rise 28 per cent next year, to $1.04 a share.
As for those dividends that may have contributed so much to Mr. Morneau, they've been stuck at 6.5 cents a month, or 78 cents a year, for several years, a victim of lacklustre free cash-flow generation (which dipped slightly in the second quarter because of higher capital expenditures and taxes).
But the yield is attractive, at 3.7 per cent. And it seems reasonable to expect dividend increases ahead, given that Ms. Price estimates that free cash flow, on a per share basis, will rise nearly 16 per cent next year.
This may explain why the stock has hit a winning streak. Since early 2016 – yes, soon after Mr. Morneau stepped away from the company – the share price has rallied about 50 per cent.
Early investors have been rewarded for sitting on the stock when it was an unknown gem. Now that it is in the spotlight, what can they expect?
Mr. Morneau's decision to sell his holdings sent the share price tumbling nearly 2 per cent on Thursday, presumably because investors are anticipating some selling pressure and wondering if a key insider is getting out of the stock at a very good price.
Chances are, though, he'll end up missing those monthly dividends.