What are we looking for?
Sustainable dividends from companies under pressure from activist investors but otherwise sound.
The screen
Canada’s Barrick Mining Corp. says it’s on track to separate its North American gold operations from its international ones. As a key step to satisfying activist investors, the split paves the way for a primary New York Stock Exchange listing for the North American offshoot.
The IPO plan also highlights the power of activist investors to shape even the largest of companies. In Barrick’s case, it was Elliott Investment Management that spurred the decision to hive off the lower-risk North American assets from those in more volatile jurisdictions.
Generally, activist investors take a significant shareholding in what they see as underachieving companies and then push for change. Their demands are often for seats on the board of directors or a call for the target company to jettison subsidiaries to increase shareholder dividends or share buyback programs.
Whatever the outcome, activist pressure draws stock market attention to a company’s underlying value. It just as often boosts dividend sustainability.
Our search started with a list of companies now the target of investor activism but with already strong long-term prospects. We then applied our TSI Dividend Sustainability Rating System to a short list of income payers. It awards points to a stock based on key factors:
- one point for five years of continuous dividend payments;
- two points for more than five;
- two points if it has raised the payment in the past five years;
- one point for management’s commitment to dividends;
- one point for operating in non-cyclical industries;
- one point for limited exposure to foreign currency rates and freedom from political interference;
- two points for a strong balance sheet, including manageable debt and adequate cash;
- two points for a long-term record of positive earnings and cash flow sufficient to cover dividend payments;
- one point for being an industry leader.
Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. Those with seven to nine points have above average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.
More about TSI Network
TSI Network is the online home of the Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor, and the TSI Dividend Advisor. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated five stocks. Ralliant Corp. RAL-N, headquartered in North Carolina, makes and services precision instruments and highly engineered products. Activist Irenic Capital Management has built a roughly 2-per-cent stake in Ralliant, and wants it to cut expenses, buy back more shares, and focus more on its defence and electronics businesses.
Target Corp. TGT-N, based in Minnesota, is a major retailer in the U.S. discount department store segment. Activist investment firm Toms Capital Investment now holds a stake in the company, although has yet to make any demands. Still, based on its recent investments in other trouble companies, the activist may pressure Target to put itself up for sale or sell some of its real estate assets (the retailer owns 75 per cent of its stores).
Baker Hughes Co. BKR-Q, with its U.S. headquarters in Houston, makes turbines, compressors, condensers and other machinery for energy producers and industrial operations worldwide. Activist investment firm Ananym Capital, which owns an undisclosed stake in Baker Hughes, wants the company to spin off its oil field equipment operations (about 50 per cent of total revenue). Demand for these products has weakened as oil producers drill more efficiently, reducing their need for outside help. The remaining company would provide critical equipment and services to operators of power plants and liquefied natural gas facilities.
Premium Brands Holdings Corp. PBH-T is a specialty-food manufacturer and distributor based in Richmond, B.C., with operations also in the United States. Texas-based Alta Fox Capital Management, which now has a 1.5-per-cent stake in Premium Brands, says that the company’s shares are “materially undervalued” and Premium needs to make changes to boost value.
Flowserve Corp. FLS-N, based in Irving, Tex., manufactures industrial pumps, valves and other machinery for several industries that use difficult-to-handle or corrosive fluids. These include power utilities and oil and gas, chemical and related firms. Flowserve is now the target of activist Starboard Value. Starboard often pushes for new chief executives or cost cutting.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.