Fabrice Taylor, Chartered Financial Analyst, is a principal in Capital Ideas Research and writes the blog fabricetaylor.com
*******
Corporate nervous nellies hold on tight to their money in bad times, riding out the storm. So what should investors make of a company that hikes its dividend as it saunters out of the teeth of recession? We should consider making a home for it in our portfolios is what.
The company in question: Aastra Technologies , which just announced record annual profits and a generous increase to the stipend paid to shareholders of record.
The name was recommended in this space almost a year ago and has done all right since. In the interim, your author bought a few shares. I think the company will continue to do well. Here's why:
Aastra's name is something of a misnomer. This is no tech company. Few tech companies make real money. Even if they earn profits, they tend to be trapped inside the company because tech is tough; tech is volatile; tech is a treadmill that never slows down.
Aastra isn't tech in that sense. The company makes and sells somewhat antiquated but still useful phone systems. It grows by acquisition, buying low-growth subsidiaries from big telecom equipment makers like Nortel and Ericsson. It then wrings out synergies, maximizing profits. Then it does it again. Acquire, cut, repeat as needed. The industry is in gentle decline, but Aastra is still growing, having made five big acquisitions since 2001.
The company earned $3.20 per diluted share in 2009. The previous year's net results are muddied by charges that make a comparison meaningless, but cash flow was almost 50 per cent higher last year before working capital changes. Revenue was flat. It would have been down because of the economy, save for an acquisition. There's no magic to the formula. Management is just good at allocating capital.
The upshot of all this is a cash machine. There's $117-million of it in the bank. If you subtract the small amount of debt that works out to $6 a share. The company, says National Bank Financial, could generate more than $5 of cash per share per year. The stock is $33. Do the math. It's cheap.
And, to a certain extent, it should be. This is a mature business. It's in decline. That calls for a low multiple. But we submit that what looks like roughly six times is far too low. The company's management and board seem to agree. Aastra churned out $68-million of cash last year and put it to good use, paying back $23-million of debt. It also bought back its stock, $18-million worth. There are only 13.8 million shares outstanding now.
Thanks to that low share count, says National Bank, every 1-per-cent rise in operating profit adds 50 cents in share profit. Expect that leverage to lead to a very good 2010 and, likely, more dividend hikes.
|
Read more about dividend stocks:
|
The board's actions seem to portend greater things. To return to our earlier question, companies that raise dividends, especially in hard times, are probably pretty confident about the future.
With its war chest, Aastra has the means to make more acquisitions. We suspect there are willing sellers out there looking to streamline their enterprises and put some cash in the bank.
If Aastra can get its profit to $5 a share, a reasonable stock price is about $50, according to analysts. At nine times earnings and oozing cash, this doesn't look like a risky bet for such upside.
******
Yesterday' s close
$32.94, down 31 cents
SOURCE / THOMSON DATASTREAM
******
By the numbers
$32.94
Aastra's stock price
8.4
PE multiple*
$6
Net cash per share
5.7
Price/free cash flow*
2.43%Yield
*Based on analyst estimates for earnings and free cash flow
for fiscal 2010
Source: NBF
Report on Business Company Snapshot is available for: AASTRA TECHNOLOGIES LIMITED