The universe of dividend paying stocks is large; however, unlike Johnson & Johnson (JNJ), Coca-Cola (KO), Procter & Gamble (PG), and other mega-and large-cap stocks, many of these names do not receive much coverage on Seeking Alpha. Perhaps it's because these stocks are not widely held because, for example, they don't meet particular investment criteria (e.g. size) or just haven't found their way onto investors' radars. Perhaps there are other reasons, and you can enlighten me? Regardless of the reasons, I thought I would present a brief discussion on one of these stocks: Evertz Technologies (OTC:EVTZF) and [ET.TO] on the TSX in Toronto.
Evertz is in the business of designing and manufacturing audio/video infrastructure equipment for the production, postproduction and transmission of television content. It has a global client-base of network and specialty broadcasters, as well as telecom companies, with almost 50% of its revenue coming from outside of the U.S. and Canada. It offers these clients a variety of products, including those that can help broadcast HD and 3D programming, as well as ones that can help deliver content through IPTV.
Evertz went public in June, 2006 after many years as a private company. The Globe & Mail reports that management's objective in becoming a publicly traded firm was less about funding further growth than it was about gaining credibility with potential U.S. and international clients. As a result of its financial strength, Evertz was in a position to pay its first dividend a little more than one year after its IPO. The company has paid a regular dividend since the last quarter of 2007. Evertz has rewarded shareholders with double-digit annual dividend increases in three of the past four years, including a substantial 37.5% increase in 2010. Its current yield is 3.86%. To complement its growing dividend, Evertz also bought back 2.166 million common shares in 2011-2012. Furthermore, it announced the approval of another normal course issuer bid in July, 2012 which permits it to buy back up to another 3.657 million common shares (approximately 5% of its outstanding common shares).
While these share buybacks and dividend increases appear to signal a shareholder-friendly approach by the firm, one point of interest for investors is the company's rising payout ratio. Initially quite conservative, Evertz's payout ratio jumped significantly in 2010 to 53% because of both higher distributions and lower earnings. After abating somewhat in 2011, its payout ratio spiked again in 2012 (to 69%) for the same reasons. Coinciding with this second surge, management raised R&D spending by 24% (to $44 million) in 2012. This seems to suggest that the company is not sacrificing future growth for today's distributions; however, any continuation in this higher payout ratio trend would be concerning.
$0.26/$1.17 = 22%
$0.32/$1.36 = 24%
$0.44/$0.83 = 53%
$0.46/$1.04 = 44%
$0.56/$0.81 = 69%
Looking forward, analysts are projecting average earnings per share of $1.10 in 2013 (range: $1.05-$1.23) and $1.20 in 2014 (range: $1.13-$1.32). I haven't been able to find any official management commentary about their dividend, but let's assume two slightly more conservative payout ratios of 50% and 60%. Calculations employing these ratios imply a potential annual dividend in the range of $0.55-$0.66 for 2012 and $0.60-$0.72 for 2013. For 2013, this would result in a dividend change in the range of -1.8% to +17.9%. Through its annual dividend increases, management appears to be signaling a shareholder friendly approach, so I think it's relatively safe to assume that they're not going to cut the dividend in 2013 and burn that positive equity. However, using 2011 as a guide - which followed lower earnings in 2010 - it's probably more realistic to assume a smaller dividend increase to $0.58-$0.60 in 2013, rather than one that represents another double-digit increase.
50% Payout Ratio
60% Payout Ratio
From a price perspective, analysts have an average 12-month target of $17.00 on Evertz (range: $16.00-$20.00) (Source: Thomson Reuters STOCKREPORTS+). At its present price of $14.50, the stock currently trades at a PE ratio of 16; however, its PE has ranged from 12.46 to 17.36 over the past 5 years. Assuming earnings of $1.10 in 2013, this 5-year range would imply a 12-month price somewhere in the vicinity of $13.71 (-5.5% return) to $19.10 (+31.7% return).
This price range, as well as the dividend projection, is of course rooted in analysts' predicted earnings for Evertz. With this in mind, it is important to note that the company has recently missed quarterly earnings expectations on three occasions (October 2011, January 2012, April 2012); it exceeded expectations in July 2012 (Source: Yahoo Finance). In the 2012 annual report, management cites the tough global economic environment as being a challenge for the firm, so if you're concerned about strong economic headwinds in the next 12 months you will want to be more conservative with your price and dividend expectations for the company.
Evertz has demonstrated strong dividend growth since going public. Some of this growth may be attributed to management's willingness to raise the firm's payout ratio, which is positive in what it signals, but only up to a point. Over this time, the company has also experienced some earnings instability, which is concerning because of its potential to put downward pressure on future dividend and share price increases. Given the current economic uncertainties, which may dissuade customers from investing in Evertz's products, it is probably worth waiting for a pullback before investing in Evertz in order to manage downside risk.
Have anything to add about Evertz? Please share your thoughts.