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yield hog

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

Looking for a dividend that will keep on trucking? You might consider hitching a ride with TransForce Inc.

Montreal-based TransForce operates trucking, package delivery, logistics and waste management services and is perhaps best known for its courier brands, including Loomis, Canpar and ICS.

Employing a strategy of growth through acquisitions, the company has bought about 140 businesses over the past 15 years and in 2013 generated revenue of $3.1-billion. As it grows, TransForce looks for ways to cut costs and make its operations more efficient in a bid to boost margins.

Its efforts have delivered some impressive results for investors. For the five years ended May 2, TransForce posted a total return of 39.2 per cent on an annualized basis, compared with 10.8 per cent for the S&P/TSX composite index. (Both figures include dividends.)

To be sure, it will be a challenge to post such boffo returns over the next five years, but there are reasons to believe that TransForce's shares will keep rolling. Here are four reasons I like the stock (which I don't own personally, but would consider buying on weakness).

The dividend is growing

A former income trust, TransForce slashed it distribution by about 75 per cent in 2008 as it prepared to convert to a corporation. Since then, it has announced three dividend hikes – the most recent an 11.5-per-cent increase in October.

True, the yield of 2.5 per cent won't make you rich, but given the growth in TransForce's free cash flow – the company is projecting $250-million in 2014, up from $225-million in 2013 – the dividend will almost certainly continue rising. On a per share basis, the 2013 free cash of $2.43 provides ample coverage for the dividend of 58 cents a share, with plenty of money left over for share buybacks, acquisitions and debt payments.

Shares are reasonably valued

TransForce is coming off back-to-back quarters in which severe winter weather hammered its bottom line. For the first quarter ended March 31, snowstorms, closed highways, shipping delays, consumer spending weakness, accidents and rising insurance costs all contributed to an 18-per-cent drop in adjusted net income.

Reflecting its disappointing results, TransForce's shares have basically gone nowhere over the past six months. But that's a good thing for prospective investors: The shares now trade at less than 11 times estimated 2015 operating earnings of $2.20 a share, which some analysts consider attractive.

TransForce "has amassed a group of high quality assets with strong growth and profitability potential that we believe warrants a premium valuation," RBC Dominion Securities analyst Walter Spracklin said in a note. "At current levels we do not believe that the market is recognizing the potential of these assets."

Garbage in, money out

TransForce has various ways to bring the value of its assets to the surface. For example, starting in the second quarter it intends to break out results of its high-margin waste management operations separately, allowing investors to put a value on the business.

Ultimately, after expanding the waste division through acquisitions and organic growth, TransForce may look to spin it off to create shareholder value, Desjardins Securities analyst Benoit Poirier said in a note.

E-commerce opportunity

With more consumers shopping online, TransForce is aiming to capitalize on the e-commerce boom. It recently signed a deal to provide same-day deliveries in New York for the recently launched Google Shopping Express. The service has proved to be so popular with Manhattanites that Google had to cut off new orders at noon on Monday – hours earlier than the stated 4:30 p.m. deadline – according to the New York Post.

"The New York market is really booming for us right now. We are overwhelmed," Alain Bédard, TransForce's chief executive officer, said during the first-quarter conference call on April 25. "We have a special team that has been sent there to New York just to support the growth of our customers."

TransForce is hoping to team up with Google in other cities and is in discussion with about serving the Toronto market – moves that could add meaningfully to its bottom line.

"Given the strong growth trajectory of e-commerce across North America, we see significant upside if [TransForce] is able to align with the major players in this industry," Mr. Spracklin said.

Closing thoughts

TransForce has given investors a bumpy ride recently and that volatility could continue, given that the shares are susceptible to trends in the weather, economic growth and consumer confidence.

That said, if the company can successfully integrate acquisitions and boost margins through cost-saving initiatives, the shares should deliver solid long-term returns through growing dividends and share price appreciation.