Stock Smarts: Cyclical Stocks Are Back In Favour
The past few years have been rough on cyclical stocks: mining, materials, forestry, and the like. But now things have turned around and some of these stocks were among the best performers in 2016.
Norbord is one of those turnaround companies. It is a leading producer of oriented strand board (OSB), which is used in home construction and is also more frequently for industrial and commercial building. Its business thrives during periods of strong economic growth, when home building peaks, and suffers when the economy slows and building declines.
Investors have had to live through these cycles in recent years. When I first recommended the company in my Income Investor newsletter in May 2013, the quarterly dividend was $0.60 per share, for a yield of 7.1 per cent. But tough times forced the directors to cut the dividend to $0.25 per quarter in June 2015 and then to $0.10 in a couple of months later. That represented a total decline of 83 per cent in the payout, dropping the yield to 1.2 per cent.
The stock price reflected the company’s financial fortunes. You could have bought shares for as little as $19.44 last February. However, the down leg of the cycle appears to be over. Financial results have been steadily improving and the stock price is up about 75 per cent since the February low.
Norbord reported sales of $453 million during the third quarter, up almost 20 per cent from $378 million in the same period a year ago (note that the company reports in U.S. currency). The sales boost was due mainly to a 48 per cent year-over-year improvement in the price of OSB.
Net earnings were $55 million ($0.64 per share, fully diluted) compared to a loss of $9 million (-$0.11 per share) a year ago. For the first nine months of the fiscal year, Norbord earned $122 million ($1.42 per share), compared to a loss of $69 million ($0.81 per share) in 2015.
“Our financial performance continued to improve in the third quarter as North American benchmark OSB prices strengthened further,” said CEO Peter Wijnbergen. “Norbord generated adjusted EBITDA of $114 million, marking the seventh consecutive quarter of improvement. As we enter the seasonally slower winter building period, North American benchmark OSB prices remain well above where they were this time last year as U.S. housing starts, particularly single-family, continue to recover and drive increasing OSB demand.”
The company has not yet moved to raise its dividend but in a recent research report RBC Capital Markets analyst Paul C. Quinn said he expects Norbord to triple its payment to $0.30 per quarter around the middle of next year.
At this point I regard the stock is a buy for aggressive investors looking for a big dividend boost and some capital gains potential. Ask your financial advisor if a cyclical stock such as this is suitable for your account.
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.