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A Top Growth Stock for High Returns Today

Growth stocks can greatly boost the returns of your portfolio. The average market returns have historically been 10% with inflation included.

At first glance, conservative investors might disregard Stella-Jones Inc. (TSX:SJ) as a potential investment because it’s in the materials sector. However, there are many reasons to like the company, one of which is its track record of growth.

Between the end of August 2010 and 2016, Stella-Jones’s average annualized rate of return was 36%, which equated to total returns of just over 539%. In that period, dividends only contributed 3% of its total returns.

The business

Stella-Jones is a leading North American producer and seller of pressure-treated wood products and related services. Last year almost 80% of its sales were railway ties and utility poles. Its main clients include railway companies, electrical utilities, and telecoms, which provide necessary infrastructure for the economy.

Over time these companies will continue to replace old railway ties and utility poles to provide safe and uninterrupted service for their clients. So, there should be a steady demand for Stella-Jones’s products.

Stella-Jones also has a growing residential lumber business that contributed 27% of its sales in the second quarter. Furthermore, the company continues to grow organically and through acquisitions.

Consistent returns

Stella-Jones’s return on equity has been consistently in the double digits–between 15% and 24% in the last decade. In the last five years, it has been between 16% and 18%.

Its proven ability to generate returns from shareholder equity has led to strong dividend growth in the past five years, in which the company grew its dividend per share at a compound annual growth rate (CAGR) of 27.5%. Its three-year dividend-growth rate is consistent with that percentage at a CAGR of 26%.

If Stella-Jones maintains its quarterly dividend per share of $0.10, then this year’s dividend per share will be 25% higher than last year’s. There’s no reason that the company wouldn’t maintain its dividend until the end of the year as it’s only paying out about 16% of its earnings, and it has an 11-year dividend-growth streak that it’ll likely want to continue. So, investors can expect the company to hike its dividend next year.

Recent developments

Stella-Jones’s Ram Forest Products acquisition in October last year added two plants in Ontario and a vital strategic alliance with a major big-box chain. Stella-Jones anticipates the acquisition will bring sales of treated lumber and related products to 20% of total sales, which would be an increase of 11% compared with last year.

In June a wholly owned subsidiary of Stella-Jones acquired Lufkin Creosoting. “The acquisition … further improves Stella-Jones’s ability to provide the North American utility and industrial markets with high-quality treated wood products. This transaction will expand our market reach and will be immediately accretive to earnings,” said Brian McManus, president and CEO of Stella-Jones, in the press release.

Swap current income for growth

You’ll notice that Stella-Jones offers a small dividend yield of 0.9% compared to the typical companies one would buy for dividends, such as Bank of Montreal and Telus Corporation, which yield about 4%.

However, due to Stella-Jones’s high-growth track record, it has been increasing its dividend at a double-digit rate that more mature dividend-growth stocks such as Bank of Montreal and Telus can’t provide.

Essentially, by investing in Stella-Jones, you’re trading current income for growth. That is, you expect most of your returns to come from price appreciation and your income stream to grow at a faster pace than average.

Conclusion

Stella-Jones is an excellent company to consider for growth in a diversified portfolio. At under $44 per share, it trades at a forward price-to-earnings ratio of 17.3, which is inexpensive for a company that’s expected to grow at a double-digit rate in the medium term.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of STELLA JONES INC and TELUS.

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