Back in September 2015, I wrote a negative article on Just Energy Group Inc. (TSX:JE)(NYSE:JE), titled “Why I’m Staying Far Away From Just Energy.”
There were many reasons why I was bearish on the stock. The internet is filled with complaints about the company’s sales reps. I hated the door-to-door sales model. And it’s hard to like a company that has cut its dividend twice since 2013.
But I have since changed my tune. I’m no longer bearish on Just Energy. In fact, I’ve turned relatively bullish on the company. I’ll likely add it to my portfolio in the next few weeks.
Here’s why I was wrong about the company, and why you might be, too.
The business model
I’m fortunate. Unless I move, I’ll never have to experience another energy sales rep knocking on my door again thanks to a new Alberta law that bans most door-to-door sales in the province. I can finally take down my “No Solicitors” sign, although it didn’t do much good in the first place.
I’m the first to admit that a door-to-door business model isn’t ideal. It incentivizes sales reps to stretch the truth. By the looks of it, thousands of sales reps have done exactly this. Even if a sales rep tells the truth, a disappointed customer with high expectations is still a problem.
But after doing a little bit of research online, I realized something. Every company in the energy-reselling business has thousands of former customers that hate them — just like every major bank or telecom company or grocery store.
Commercial customers are a more important side of the business anyway — 58% of revenues come from businesses, which have a pretty compelling reason to use the company’s services. Paying a fixed price for electricity or natural gas is a big advantage for a business. Cost certainty is important, even if it might end up cheaper to pay a floating rate in the long run.
Expansion potential
Another thing I like about Just Energy is its growth potential.
The company is already well entrenched in Canada, operating in the country’s six largest provinces. It only operates in 14 U.S. states, so there’s further expansion potential there. The company has also successfully expanded into the U.K., where it has grown sales from $6 million in 2013 to $452 million in 2016.
It looks to replicate that success in other markets, especially Germany. It just spent €3.35 million for 95% of SWDirekt, which gives it a foothold in the market. Other potential expansion targets include Japan, Mexico, and Ireland.
Important shareholders
One of the most interesting things about Just Energy is the company’s two biggest shareholders.
The largest shareholder is Jim Pattison, the Vancouver-based billionaire. Pattison owns more than 25 million shares — an ownership stake that’s worth close to $200 million. That might be small potatoes for a man worth more than $7 billion, but it’s still a substantial position.
Another big shareholder is Ron Joyce, the man who built Tim Hortons from a single location to a fast-food powerhouse. Joyce owns 18.7 million shares — a position worth more than $144 million. Together, the two men own about 30% of the company.
When one billionaire has a huge position in a company, it’s worth noting. When two are heavily invested, it usually means good things.
The dividend
I’m the first to admit a company that has cut its payout twice should be a little concerning, especially when it pays a 6.5% dividend today.
But today’s payout is rock solid. Just Energy earned $180 million in free cash flow in its last four quarters. It paid out $95 million in dividends for a payout ratio of just over 50%. I look at a lot of high-yielding stocks, and there aren’t many that yield 6.5% with a 50% payout ratio.
The bottom line
Just Energy is a misunderstood company. It provides a valuable service for millions of customers, and the associated hate is a by-product of its sector. The company also has two extremely smart guys as major shareholders, and it pays a nice dividend. There’s a lot to like here.
