Wednesday, March 20, 2013

Veresen Inc

On my other blog I am today I am writing about Stock Price Ratios...continue...

I own this stock of Veresen Inc. (TSX-VSN, OTC- FCGYF). I bought this stock in December 2008 and March 2009. When I bought it, it was still a limited partnership under Fort Chicago Energy (TSX-FCE.UN). When I bought this stock it had a good record of distribution increases. However, since they decided to change to a corporation, there has been no dividend (or distribution) increases. We are in the 5th year of no increase and I do not see any in the immediate future either.

There are 10 analysts covering this stock and they all see no increases for the dividends. They also see no decrease either. Certainly, analysts covering this stock feel that the current dividend level is sustainable because of cash flows. See forecasts at Financial Times.

The problem this company has is that it is not making enough in earnings to cover the dividends. The 5 year median Dividend Payout Ratio for Earnings is 303%. However, if you look at DPR for CF, the 5 year median is much better at 63%. The DPR for Adjusted Funds from Operations (AAFO) is also fine with the 5 year median at 85%.

I have done well on this stock as I got it at a good price. I have a total return 28.97% per year on this stock with 16.02% per year from capital gain and 12.95% per year from dividends. If you look at the past 5 and 10 years, the total return for this stock is 10.70% and 13.39% per year, respectively. The return from capital gains is 1.76% and 3.67% per year, respectively. The return from dividend is 8.94% and 9.72% per year, respectively.

At some point they are going to have to get the earnings above the dividends. Personally, I think that they should bit the bullet and cut dividends in half. I cannot see total return much above the dividend distributions until they are in a position to increase dividends. However, since the dividend has yield of 7.67%, the stock has a pretty good return.

The outstanding shares have increased by 8.5% and 10.3% per year over the past 5 and 10 years. Shares have increased due to Stock Issues, DRIP and Conversion of Debentures (to shares).

They changed their accounting rules from CDN GAAP to US GAAP. This accounting change and greatly affected the Revenue and I can get no fix on growth in Revenue. Analysts do expect Revenue to increase in 2013 and 2014.

The calculation of earnings does not seem to be affected by the accounting change. No matter how you look at it, 2012 was not a good year for this company. Earnings per Share is down 40% for 2012. (The company also took a 40% EPS cut in 2011.) Analysts expect EPS share to rise this year and next. The only positive thing to say is that the company has earnings.

The Cash Flow per Share is also down for 2012 by some 34%. CFPS has decreased over the past 5 years by 9.4% per year, but has increased over the past 10 years by 7.3 per year.

Before 2011, the Return on Equity was ok. Last year and this year it has been quite low, with ROE coming in at 6.5% and 4% respectively. The ROE on comprehensive income is lower at 3.5%, but there is usually a difference between net income and comprehensive income.

One warning message is from the Accrual Ratio. I get one of 30.14% for 2012. This is quite high and would suggest that stock price should go down this year. However, so far this year, the stock price is up 10%. We are currently in a bit of a bull market.

Generally, the Liquidity Ratio has been quite low, but the company had good cash flow. For the year ended in 2012, the Liquidity Ratio was a very good 1.66. The Debt Ratio has been low in the past, but for 2012 it was also quite good at 1.67. The Leverage and Debt/Equity Ratios have also improved and for 2012 stand at 2.70 and 1.53. These are good ratios for a utility.

I still think that for longer term they should cut their dividend. However, a number of analysts imply they are recommending this stock because they expect the current dividend to continue. The company has the cash flow to pay the dividend. The problem with paying a dividend that cannot be covered by the earnings is that book value will decrease.

I will not be buying more stock, but for now I will be holding on to what I have. I do not have much, less than .5% of my portfolio in this stock. I still do not like the fact that the earnings do not cover the dividends. Maybe I am old fashion, but sometimes you earn money by being old fashion.

Veresen is a leading diversified energy infrastructure company that owns and operates energy infrastructure assets across North America. We are engaged in three principal business lines of Pipelines, Midstream and Power (gas-fired and renewable facilities). Its web site is here Veresen. See my spreadsheet at vsn.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 or StockTwits.

No comments: