Thursday, June 9, 2011

Manitoba Telecom Services Inc

I own this stock (TSX-MBT). I first bought this stock in 2006 after reading a report about it at TD’s Waterhouse. They gave it an action buy rating (basically their Strong Buy Rating). I bought it for my Trading Account, my Pension Account and my RRSP account. I have sold it from my Trading and Pension account in 2010. This stock has been a disappointment.

For all accounts, I have made a return of 3.3% per year. I still have this stock in my RRSP account. Under this account, I have a total return of 4% per year. As far as I can see, the dividend portion of my total return is 7%. This means, I have lost capital, but have made some dividend money that covers my capital loss and then a bit more.

This company lowered their dividends by 35% this year (2011). Their payout ratio compared to cash flow has not been bad, with a 5 year median of 34%. However, the payout ratio compared to earnings has a 5 year median of 116%. This is not good. You would want a payout ratio re earnings not higher than 75%. Dividends are basically now where they were in 2004.

It is expected that earnings will be around $2.43 this year and with a dividend of $1.70, payout ratio compared to earnings is expected to be 70%. However, analysts were very wrong on where earnings would be for 2010. I had an estimate of $2.01 and they came in at $1.54. At the end of 2010, for the 4th quarter, there was a huge range given by analysts for the fourth quarter.

As I said above, this stock has been a disappointment. When looking at my spreadsheet, all growth figures are low or negative. For example, the 5 and 10 year earnings growth is negative 13% and 0% per year, respectively. Book Value growth for the last 5 and 10 years is negative 1% and 3.7%. Book Value has been decreasing for the last 4 years and for the 1st quarter of 2011, it decreased even further by a walloping 28%. This occurred when they changed their accounting rules to IFRS.

With a change in accounting rules, there are winners and losers. This company lost as far as book value is concerned. If I had used the book value under the IFRS rules for 2010, the growth in book value would be a negative 9.2% and a 0% per year over the past 5 and 10 years. Also, Book Value is going down, because the company seems to be losing money, not making any.

In order to make a profit, first you need revenue. For this stock revenue growth is not good. Revenue growth for the last 5 and 10 years is negative 3.3% and 7.6% per year, respectively. Revenue per share for the last 5 and 10 years is negative 2.5% and 6.2% per year, respectively.

With debt ratios, the really bad one is the Liquidity Ratio. Liquidity Ratio is using current assets and current liabilities. The Liquidity Ratio has seldom been good. For the end of 2010 it was 0.51. The current one is 0.36. When the ratio is below 1.00, it means that current assets cannot cover current liabilities. For this stock, as far as I can see, cash flow cannot make up the shortfall. The Asset/Liability Ratio is better, with 2010 ratio being at 1.81 and the current one being at 1.57. They are both above what you would like to see, which is a ratio at 1.50 or higher.

The other debt ratios are fine. The Leverage is currently at 2.76 and the Debt/Equity Ratio is at 1.76. With these ratios, you want to compare them with other companies in the same industry.

I haven’t year decided what to do with my remaining shares in this company. However, I do not consider this is a company I would want for the long term. Tomorrow, I will look at what the analyst currently are saying about this stock.

This company is a full-service communications company. It serves residential and business customers in Manitoba. Their Allstream division serves national business consumers. Its web site is here Manitoba Telecom. See my spreadsheet at mbt.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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