Dividend growth investors have few Canadian dividend stocks to chose from when making their investment decisions. Typically, investors use the Canadian Dividend Aristocrat or All-Star lists as a starting point to their stock selection.
Unfortunately, there are approximately 100 stocks on that list which makes it a narrow selection. While it is no surprise that financials have the highest representation (~20% of the list), investors might be surprised to know that Industrials have the second largest representation at around 16%.
Which industrial tops the list? That would be Toromont (TSX:TIH) and the company’s 31 year dividend growth streak is the third longest in the country, better than dividend stalwarts like Enbridge (TSE:ENB) and TC Energy (TSE:TRP).
Streak in jeopardy?
While this is a fantastic streak, there is reason for concern. In early February, the company announced fourth quarter and year-end results.
Toromont has an inconsistent history of meeting estimates, but usually results come in around expectations. Last quarter was no different. While it beat on earnings, it missed on revenue. The revenue miss was not much to be concerned about as it missed by less than 2 percentage points ($992M vs $999M expected).
On the flip side, the earnings beat was nothing to get excited about as it too represented less than 2% ($1.08 vs $1.06). Overall, it was a steady quarter.
So why the concern? Historically, the company has always announced their annual dividend raise along with fourth quarter and year-end results. Unfortunately, this quarter came and went without a raise. Toromont chose to keep the quarterly dividend steady at $0.31 per share.
Over the course of its streak, the company failed to raise the dividend at this time of the year only twice (back in 2010 and 2011). In 2011, it ended up raising several times and only once in company history has it kept the dividend steady for more than four quarters, and that was in 2009-10.
Strong payout ratios
In my opinion, the company is being overly cautious. In 2020, earnings took a meaningful dip – not surprising given the pandemic. However, Toromont has posted strong earnings growth in recent years and despite last year’s dip, the dividend is still well covered.
The dividend accounts for only 38% of earnings and 32% of cash flows. Looking forward, 2020’s earnings dip is but a blip on the radar. Analysts expect strong earnings growth out of the company and the dividend accounts for less than 30% of forward earnings.
While the lack of a dividend raise this past quarter is no doubt disappointing, investors should not be immediately concerned. It is still well positioned to raise dividends and is likely to do so by end of year.
Market Cap: $7.64 billion
Forward P/E: 24.16
Dividend Growth Streak: 31 years
Payout Ratio (Earnings): 40.13%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 14.80%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
Is Toromont a buy today?
Now that investors can rest assured the dividend is safe, is Toromont a buy today? Despite a dip in earnings, Toromont has been a strong performer.
Over the past year, it is up by almost 40% and it is trading near all-time highs. Unfortunately, it is also trading near all-time high valuations and well above averages. At least when compared to historical metrics such as P/E, P/E and P/B ratios.
Looking forward it looks better priced as it is trading at 25 times forward earnings. While this isn’t cheap and still above historical averages, it isn’t overly expensive.
All things considered, Toromont is an excellent income stock and one that dividend growth investors should be considering for their portfolios. It has a strong history of execution and is one of the best performers in the industry. Don’t expect that to change any time soon.