Money: This High-Yield Stock is Worth a Look
With interest rates in this country showing no signs of moving higher any time soon, investors continue to search the stock markets for investments that offer decent cash flow at a reasonable risk.
Finding yield isn’t difficult. It’s the risk part of that equation that often trips up investors.
Consider the energy sector. Two years ago, there were many companies that were paying dividends of 5 per cent and more. Most looked solid and secure, and they were—as long as the price of oil stayed above $100 a barrel. When the bottom fell out, the revenue that these companies depended on to pay off investors fell dramatically. Most energy companies were forced to cut or even eliminate their payouts. Share prices fell across the board. What appeared to be a safe source of cash flow suddenly turned sour.
It was a reminder that there is no such thing as a risk-free investment. A company that looks good today may be torpedoed tomorrow, sometimes by events completely beyond its control. With that caveat, here are two yield stocks that I think look reasonably safe in the current environment. Prices are as of the Sept. 27.
Enercare Inc. (TSX: ECI)
Type: Common stock
Current price: $18.97
Annual payout: $0.924
Yield: 4.87 per cent
Comments: Enercare is one of North America’s largest home and commercial services and energy solutions companies with approximately 3,800 employees. It is a leading provider of water heaters, water treatment, furnaces, air conditioners, and other HVAC rental products.
The stock has enjoyed a nice upward move in recent months, driven higher by good financial results and investors seeking low-risk, high-yield securities.
Second-quarter results saw revenue increase by 81 per cent year-over-year to $244.1 million, driven mainly by the contribution from the acquisition of Dallas-based Service Experts, which provides of HVAC repair, maintenance, new equipment sales, and related services to residential and commercial customers in 29 U.S. states and three provinces in Canada. The US$340 million deal closed in May and gives Enercare a major presence in the U.S. market.
Although the acquisition has boosted revenue, it has not had much effect on the bottom line so far. Earnings for the second quarter were $16.1 million ($0.17 per share), down from $16.2 million ($0.18 per share) in the same period of 2015. For the first six months of the fiscal year, net earnings were $24.2 million ($0.26 per share) compared to $24.1 million (also $0.26 per share) the year before. However, acquisition adjusted EBITDA improved in the second quarter to $74.7 million from $61.4 million in 2015.
The company raised its dividend by 10 per cent at the time of the Service Experts acquisition, to $0.077 per month ($0.924 annually). The stock yields almost 5 per cent at the current price.
Enercare has an almost recession-proof business with good growth prospects as a result of acquiring Service Experts. However, I would not chase the price much beyond the current level.
Ask your financial advisor if this stock is suitable for your portfolio.
Disclosure: I own shares in the company.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.
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