It was a double punch that knocked the wind out of two dividend-paying stocks on Wednesday. Management at Torstar announced that it will be cutting its dividend in half to 26 cents per share annually. The stock price fell 6 per cent. In addition, management at Wi-LAN slashed their annual dividend to 5 cents per share from 21 cents, sending the stock price plunging 27 per cent.
When a dividend stock cuts or suspends its payout, the financial impact to shareholders can be painful. Discussed below is one stock whose attractive 5.5-per-cent dividend yield appears sustainable.
The company
Extendicare has a network of senior-care centres and home-health-care operations across Canada. Listed below are a few key attributes.
Growth: Last quarter, Extendicare reported revenue of $243-million including $33.5-million from the recent acquisition of home-health-care business from Revera. Same-store revenue advanced 4.3 per cent. The company reported adjusted funds from operations of 14 cents per share, up from 10 cents reported during the same period last year. The company will be reporting third-quarter results on Nov. 10.
Cashed up: The company received over $200-million (U.S.) from the sale of its U.S. assets, as management turns its focus to its Canadian operations. The proceeds gives management the financial flexibility to fund its growth objectives and to make acquisitions.
Development: The company is currently developing three private-pay retirement centres in Ontario, which will total 304 beds when completed. Two centres are anticipated to be completed in 2016 and one centre is expected to open in 2017. More beds translates to more revenue.
Demographics: Demand is rising due to the aging population while supply is limited, creating attractive industry fundamentals. Occupancy rates are high at long-term care facilities with average daily revenue rates rising.
Activist investor: In July, Toronto-based Oxford Park Group announced that it has acquired a stake of more than 5 per cent in Extendicare in a move to unlock shareholder value.
Dividend policy
Management is committed to returning capital to shareholders. The company pays shareholders a monthly dividend of 4 cents per share, or 48 cents a year, equating to an annual dividend yield of approximate 5.5 per cent. The dividend appears sustainable. For the first half of the year, the payout ratio was 76 per cent of adjusted funds from operations.
In addition, management has been active in its share repurchase program. As of the beginning of August, the company repurchased over one million shares year-to-date at an average price of $7.20 per share.
Valuation
The stock is trading at a price-to-adjusted funds from operations (P/AFFO) multiple of 14 times the consensus estimate, which falls between the multiples of its peers. Sienna Senior Living is trading at a multiple of 13 times, and the industry leader, Chartwell Retirement Residences, is trading at a multiple of 17 times. Analysts forecast double-digit AFFO growth for 2016 for Extendicare, compared to mid-single-digit growth forecast for Sienna and Chartwell, suggesting that the stock is reasonably valued at its current level.
Chart watch
Year-to-date, this stock has been a stellar performer and is up over 30 per cent. On a technical basis, the chart looks positive with the uptrend intact; however, in the near-term, the shares may be due for a pause given its strong rally.
There is strong overhead technical resistance at $9, and then at $10. There is downside support at $8, and failing that around $7.70, near its 200-day moving average. The stock price is trading north of both its 50-day and 200-day rising moving averages – a bullish sign.
The average daily volume over the past three months is just over 300,000 shares, decent liquidity for this small-cap stock.
Analysts' recommendations
Since August, there have been four analysts reports issued, with one buy recommendation and a $10 price target, and three hold recommendations with price targets of $8.25, $8.50 and $9. The average one-year price target is $9.04, implying the shares are nearly fully valued.
The consensus AFFO forecast is 52 cents per share in 2015, increasing 17 per cent to 62 cents in 2016.
The bottom line
I never like to chase a stock, and recommend investors wait and accumulate shares on weakness.
As always, I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com.
