A better bet? Consider the benefits of investing in a company that has a big backlog of orders over the next several years. SNC-Lavalin Group Inc. (OTCPK:SNCAF), the Canadian engineering and construction firm that reports its second-quarter results on Friday, comes to mind.
The two ideas are related. The Transocean-GlobalSantaFe merger, besides being big, also stuck out for its proposal to take the substantial eight-year order backlog of about US$33-billion for the two companies and monetize nearly half of that amount. That way, the two companies can sell the deal to shareholders with a US$15-billion sweetener in the form of one-time special dividends.
Each Transocean shareholder will receive about US$33 in cash for every share they own and each GlobalSantaFe shareholder will receive about US$22.50 per share -- handsome dividends indeed, since they amount to yields of about 30% in either case. The deal is unusual but has already been recognized by some observers as the start of a new trend, where other companies will reward investors today with cash that is coming in years down the road.
According to its first-quarter report, SNC-Lavalin has an order backlog worth about C$10.5-billion, up from C$7.7-billion at the end of the first quarter in 2006 and C$3.6-billion in 2002. Given that the company has about 150 million shares outstanding, a 50% monetization of this backlog [a percentage borrowed from the Transocean-GlobalSantaFe proposal] would reward shareholders with a special dividend worth no less than $35 a share.
SNC-Lavalin shares closed on Friday at C$38.13 in Toronto, which means that this dividend -- which is very hypothetical -- would represent a yield of more than 90%. Or, to take a more conservative estimate, a 25% monetization of SNC-Lavalin's order backlog would translate into a special dividend of C$17.50 a share. Right now, the company pays a regular quarterly dividend of just 9 a share, for a yield of less than 1%.
The company's stock has been a particularly strong performer since the start of the decade, with an 1,100% total return that has far outpaced the S&P/TSX composite index over the same period. This year alone, the stock is up 21%.
SNC-Lavalin has benefited from its focus on infrastructure projects --from roads and mines to power plants and water management -- that are sprouting up around the world as the global economy continues to grow at a brisk clip and developing economies embark upon ambitious building sprees. Most recently, it won a joint venture to build Alcan Inc. (AL)'s aluminum smelter in South Africa and purchased an engineering firm based in Mumbai, India.
The trouble is, SNC-Lavalin's shares reflect the good times already, trading at nearly 32-times next year's earnings. Clearly, some investors must be wondering how much further the shares can rise before they run out of steam. As viable strategies go, the idea of monetizing part of the company's order backlog is certainly pie-in-the-sky. But it is a strategy that will be gaining a lot of attention in the months ahead and could be just the driver investors are looking for.