The Company
ATCO is essentially an energy play but a very diversified one. They do pipelines, electricity generation and transmission, natural gas, structures and logistics. They are a world wide company(five continents based in Calgary but with manufacturing facilities in North and South America and Australia.
Financials
Earnings
I have earnings numbers since 1997 and they have never had a loss. Over those years, only 3 years have the profits decreased (2003, 2005 and 2010). This puts it in the category of companies that I would feel is fairly predictable. The 5 year average growth is 7% and the 10 year growth is 8%. Now when I look at that, I don't really care about the rate of growth over those two time periods. The stock should just be priced accordingly based on that growth rate. I do like that the growth seems consistent. They have currently only reported for the first quarter of 2012 but posted an 11% growth over the same quarter last year.
Return on Equity
I have this number for the last 10 years. The 5 year average is 14% and the 10 year is the same. Looking at the year after year numbers, it is never below 11% nor above 16%. This strikes me as again being very consistent and predictable. Love that!
Cash Flow
This is a new one for me to be thinking about. I have largely ignored cash flow in favor of earnings and return on equity but I am thinking cash flow should be looked at to see that earnings are not just a fluke.
ATCO has posted increasing cash flow from operations 7 out of 10 years. Each drop is recovered from and then some in the next year. Their operating cash flow is in the 1.5 billion dollar range as of last year. As one would expect with a company like this, there is a large capital expense which results in high financing and investing costs. This has resulted in a negative cash flow 4 out of 10 years. However net cash flow over the 10 years is about $470 million and as of last year they have $768 million in the bank (a total of $1.6 billion in current assets). I don't believe cash flow is a big issue with this company.
Debt
Their quick ratio (cash/current liabilities) is 0.77 and the current ratio (current assets/current liabilities) is 1.6. The quick ratio is not ideal but I'm ok with it being close to one given that the current is higher than 1 by a fair bit. They aren't necessarily awash with cash though.
Their debt equity ratio is 2.21 (according to MSN) so they are highly leveraged. This looks to be about average for them as well. This is one risk factor I will have to consider. However, the fact that they have been profitable every year for the last 15 years tells me that they are managing it ok.
If you calculate the debt equity using the total liabilities (MSN seems to use the rule that you only include interest bearing liabilities), you get 3.6. This is high for me but again, they make money every year so it may be OK.
Shares Outstanding
Another thing I like to look at, what is the pattern in the number of shares outstanding. I'd prefer this number stay the same or shrink. This increases value for the investors. If the company is growing, the number of shares going up is OK but it does dilute the earnings. In ATCO's case, the number of shares is fairly stable in the 57 to 59 million. So this is not exciting nor depressing.
Expected Returns
Returns come in two forms. Capital Appreciation and Dividends. Dividends can be more predictable then capital appreciation but not always.
Dividends
ATCO does not pay a spectacular dividend but it is a respectable 1.7% yield and has grown every year since 2002 (the years I have numbers for). The growth in the dividend is something I very much like.
The second thing I look at with dividends is the payout ratio. This is how much of their earnings are they paying out as dividends and how much are they retaining. In ATCO's case, they are paying out roughly 20% of their earnings as dividends. This gives a nice cushion if earnings drop in a year to at least maintaining the dividend and makes this value more predictable.
Capital Appreciation
This is where the analysis becomes more mathematical but it isn't that difficult. The last year's earnings per share were $5.64 per share and have grown an average of 7% in the last 5 years and 8% for the last 10 years. So given that, we can project forward their earnings for the next 10 years. Let's use the 7% figure to be conservative. The future value interest factor on 7% for 10 years is 1.96% which means the expected earnings per share in 10 years is about $11.09.
| Year | Earnings |
| 0 | 5.64 |
| 1 | 6.03 |
| 2 | 6.46 |
| 3 | 6.91 |
| 4 | 7.39 |
| 5 | 7.91 |
| 6 | 8.46 |
| 7 | 9.06 |
| 8 | 9.69 |
| 9 | 10.37 |
| 10 | 11.09 |
Returns
This is the first point in the analysis where you would look at price. The reason for this is simple. The idea here is you don't buy a share unless you would be willing to buy the business if money weren't an issue. So up to now, we've looked at the business. What is the business making (earnings) and what is it doing with it (return on equity and dividends)? How stable is the business and how predictable are the earnings and returns on those earnings? There is no point in looking at the price unless you can value what you are buying at that price. Imagine if you were offered to buy a product each from two salesman. One offers you to be able to buy his product for $100 and the other for $20. Unless you know what the product is and what it is worth to you, there is no way to evaluate the offer. If the first product is a Ferrari and the second a bag of M&M's, the analysis is very different then if the first is a movie ticket and the second is a dinner out at a nice restaurant. You need to know what you are buying before you buy it.
Initial Rate of Return
The initial rate of return is the last earnings per share value (or the trailing eps) divided by the price. This is a good initial look at whether or not the company is returning enough value for the investment. In ATCO's case, the current price (as of July 7th , 2012 at 8:08 am central time) is about $75.42 and the trailing EPS is $5.87. That is essentially the money the company is making per share. That is an initial rate of return of 7.8%. This is pretty good given the return on a bond or GIC.
Total Dividends
Total dividends are pretty easy to calculate. Basically, the current dividend is $1.41 per share. Over the next 10 years they will be growing this pretty much along with earnings at 7%. So next year the dividend should be 1.22, the year after 1.31 and so forth. By my calculation, this puts total dividends
The following table shows the dividends:
| Year | Dividend |
| 0 | 1.14 |
| 1 | 1.22 |
| 2 | 1.31 |
| 3 | 1.40 |
| 4 | 1.49 |
| 5 | 1.60 |
| 6 | 1.71 |
| 7 | 1.83 |
| 8 | 1.96 |
| 9 | 2.10 |
| 10 | 2.24 |
| Total | 17.99 |
So you can expect $17.99in dividends over the next 10 years in total. That's an average return of 2.1% per year from dividends alone. That's the result of the growing dividend year.
Future Price
The other part of the calculation is what will the price be in 10 years. That's a major part of the return. How do you calculate that? Well, stocks trade as a multiple of earnings. That's the price earnings ratio. ATCO has traded since 2002 in the range of 9 to 14 time earnings. I think 14 is quite high, 9 is low so let's use 11 as the value. If the EPS in 10 years is expected to be $11.09 then the price should be about $122.04. That is a profit of $46.57 if you sold it at this price. This is an annualized return of 4.9%. Add that to the return on dividends of 2.4% and you get 7.3% return at the current price.
| Year | Earnings |
| 0 | 5.64 |
| 1 | 6.03 |
| 2 | 6.46 |
| 3 | 6.91 |
| 4 | 7.39 |
| 5 | 7.91 |
| 6 | 8.46 |
| 7 | 9.06 |
| 8 | 9.69 |
| 9 | 10.37 |
| 10 | 11.09 |
ROE Analysis
There is another analysis that can be done on this. That is the return on equity. Earnings that remain in the company are re-invested in the company's operations and earn more money. In the case of ATCO, they have a return on equity on average of 14%. Money paid out is not invested in the business (unless the investors turn it around).
This analysis gives a different way of looking at what the earnings will be 10 years from now by calculating what the company can do with the returns. It also can come up with different dividend totals given how the earnings growth is calculated. The following table shows this pattern:
So the current year they had 5.64 in dividends and had a retained earnings of 4.50. Essentially this 4.50 gets re-invested in the company and the expected return on this is 14%. This results in increased earnings the next year of 4.5 * 0.14 = $0.63. Since they payout about 20 % of what they they make, the dividend should be $1.27 and a retained earnings of $5. This continues for 10 years resulting in an EPS at year 10 of 16.26 and a total dividend over the 10 years of 21.37 (we don't count the year 0 dividend as it is already paid out.
So the price at the end of the period would be the earnings of 16.26 times the PE of 11 we used before for a total of $178.88. The capital gain would be $103.46. That plus the dividend total of 21.37 makes a total dollar value return of 124.83 with a return on investment of annualized of 10.3%.
The current PE value for ATCO is 12.8 so higher than the value we used for analysis. It is at it's 52 week high so currently this is not a buy. However I hold some ATCO right now. Should I selll?
| Year | Earnings | Dividend | Retained Earning |
| 0 | 5.64 | 1.14 | 4.50 |
| 1 | 6.27 | 1.27 | 5.00 |
| 2 | 6.97 | 1.41 | 5.56 |
| 3 | 7.75 | 1.57 | 6.18 |
| 4 | 8.61 | 1.74 | 6.87 |
| 5 | 9.58 | 1.94 | 7.64 |
| 6 | 10.65 | 2.15 | 8.49 |
| 7 | 11.84 | 2.39 | 9.44 |
| 8 | 13.16 | 2.66 | 10.50 |
| 9 | 14.63 | 2.96 | 11.67 |
| 10 | 16.26 | 3.29 | 12.97 |
| Total | 21.37 |
So the current year they had 5.64 in dividends and had a retained earnings of 4.50. Essentially this 4.50 gets re-invested in the company and the expected return on this is 14%. This results in increased earnings the next year of 4.5 * 0.14 = $0.63. Since they payout about 20 % of what they they make, the dividend should be $1.27 and a retained earnings of $5. This continues for 10 years resulting in an EPS at year 10 of 16.26 and a total dividend over the 10 years of 21.37 (we don't count the year 0 dividend as it is already paid out.
So the price at the end of the period would be the earnings of 16.26 times the PE of 11 we used before for a total of $178.88. The capital gain would be $103.46. That plus the dividend total of 21.37 makes a total dollar value return of 124.83 with a return on investment of annualized of 10.3%.
Returns Conclusion
So the expected returns on investment of ATCO at the current price is between 7 and 10%. How risky are these numbers? Well it is fairly predictable that the earnings are growing at a rate of 7-8% over the last 10 years so I suspect that the first analysis is probably the best. The dividends make up a small portion of the return (about 2%) but they are paid out year after year so that at least is money in your hands.The current PE value for ATCO is 12.8 so higher than the value we used for analysis. It is at it's 52 week high so currently this is not a buy. However I hold some ATCO right now. Should I selll?
Current Holdings:
I currently own 40 shares of ATCO at an average cost of $58.47. At that investment, my dividends from the company are yielding a respectable 2.24%. I said in my introduction that I would only sell if the fundamentals changed since investing (my initial investment was about a year and a half ago) or if the market was offering me an outrageous price. Currently the price is high but not outrageous. The expected returns over the next year are pretty good but not spectacular and the dividend is nice. It's not an exciting investment from the standpoint of big movements but it is a steady earning.
I shall hold.
BUT, what about buying more? At this price, the return isn't attractive. In order to make a 15% return on this, I would have to buy at range of $34-49. For a 10% return, more like $53-77. I think a 10% return is pretty good with this company as it does tend to be predictable and solid.
So for now it's a hold but not a buy.
UPDATE:
Right after I posted, I got a news flash about ATCO's second quarter earnings. Up 20% from last year! Cash flow from operations up as well.
The full news release is here:
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