Stock Market Smarts: This High-Yield Stock is Worth a Look

Steady cash flow, a 5.4 per cent yield and moderate risk – what’s not to like?

Finding good quality stocks with an above average yield has become a challenge for income-oriented investors. Here’s one that’s worth looking at. Prices are as of the close on March 24.

 EnerCare Inc.

Type: Common stock

Trading symbol: ECI

Exchanges: TSX

Current price: $15.54

Annual payout: $0.84

Yield: 5.4 per cent

Why I like it: Renting home comfort products is not a glamourous business but it is steady and cash flow dependable. The stock is not particularly volatile, trading in a range of $13 to $16 over the past year. The annual dividend of $0.84 provides an attractive yield of 5.4 per cent at the current price.

Financial highlights: The company reported strong fourth-quarter and year-end results on March 7. Revenue for the quarter was up 12 per cent year-over-year to $141.6 million. Net earnings came in at $13.7 million ($0.15 per share) compared to $5.7 million ($0.07 per share) in the same period of 2014.

For the full year, revenue increased 55 per cent to $563.8 million, from $362.8 million in 2014. Net earnings were $51 million ($0.56 per share), up from $22.3 million ($0.34 per share) the year before.

Much of the improvement in revenue and profits can be attributed to the company’s 2014 purchase of Direct Energy’s Ontario home and small commercial services (OHMS) business for $550 million. Enercare says the deal was “transformative” for its business, giving it direct access to its customers, control over all aspects of its operations, and larger financial scale.

CEO John Macdonald described the results as “fantastic”, not a word often seen in financial reports. He added: “Home Services dramatically grew its business while successfully managing the sizable integration of the acquisition from Direct Energy. Sub-metering, which continued to expand and achieve scale, achieved positive free cash flow and nearly doubled EBITDA.”

Recent developments: On the same day the results were released, Enercare announced it is acquiring SEHAC Holdings Corporation, commonly known as Service Experts, for US$340.75 million. Enercare said the deal will give the company a strong presence in the U.S. and will be 25 per cent accretive to 2016 normalized pro forma distributable cash flow.

Risks: There has been some erosion of rental unit customers, however it is not a serious trend at this stage. A more significant risk is the fact this is an interest-sensitive security. The company is carrying about $741 million in long-term debt, up from $692 million at the end of 2014. Any increase in interest rates would increase carrying costs as debt securities mature and would put downward pressure on the market price.

Distribution policy: The shares pay a monthly dividend of $0.07 ($0.84 per year) to yield 5.4 per cent at the current price. The company has not announced a dividend increase for this year.

Tax implications: The payments are eligible for the dividend tax credit if held in a non-registered Canadian account.

Who it’s for: This stock is suitable investors seeking above average yield, with a moderate degree of risk. I don’t expect the share price to move significantly higher in the near future.