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Where the Search for Yield Has Left Morneau Shepell Inc.

Morneau Shepell Inc. (TSX:MSI) is a rarely discussed dividend-paying gem. With a market capitalization just over $1 billion, most investors have probably never heard of this company, which is retained by employers to support the employees with various challenges, including financial and retirement counseling and health and productivity assistance. As most would tend to agree, with the increase in demands on employees, the services of Morneau Shepell are becoming more necessary.

Attesting to this is the increase in revenues from 2012 to 2015. In 2012, total revenues were $419 million; they grew every single year to $567 million in 2015. For the first three quarters of 2016, revenues totaled $443 million. The $443 million annualized equates to approximately $590 million for the year. The company’s revenues grew at a compounded annual growth rate (CAGR) of 10.6% between 2012 and 2015.

Over the same period, earnings per share were $0.38 for 2012, $0.21 for 2013, $0.48 for 2014, and $0.37 for 2015. The average over the four years is $0.36 per year with dividends of $0.78 per share in each of the same four years.

There’s more to it. Let’s keep going.

In a company such as Morneau Shepell, it is clear the dividends depend on the cash flows rather than the earnings per share (EPS). In this particular case, the cash from operations (CFO) have been increasing every year, yet the dividends have not. In 2012, the company paid out 101.6% of the CFO in the form of dividends. In 2013, the percentage declined to 94.7% and continued to decline in 2014 to 76% and then to 59% in 2015.

This is fantastic news for investors and for the company. Through the first three quarters of 2016, the dividends paid to investors account for approximately 74% of CFO, but not to worry — the year is not over yet.

As an investor chasing down the best dividend-yielding and dividend-growing securities, I’m a huge fan of dividend increases, declining payout ratios, and a rock-solid balance sheets. Morneau Shepell’s dividend has not increased since 2012 (but I do have my hopes up), the payout ratio has declined significantly, and the balance sheet is very good, but not excellent.

Back in 2012, the debt ratio, measured as total assets divided by total liabilities, was approximately 2.02 and proceeded to decline to approximately 1.6 by the end of 2015. As of the third quarter of 2016, approximately $60 million of the long-term debt was paid down and the debt ratio returned to a respectable 1.94.

Having paid down a significant portion of the company’s long-term debt, management has been very responsible in managing the company’s finances. Given the historic high payout ratio, it may again be time to strongly reconsider this company, which offers investors a 4% dividend yield with the potential for price and dividend appreciation.

Remember: time is the friend of the wonderful company and the enemy of the mediocre.

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