Exco Technologies Limited (TSX: XTC) has been a steady, well-run company over its history, and shareholders have been rewarded with regular dividend increases. The stock has declined 28% in the last year, and I view this as a good opportunity for investors to get into a high-quality name that would be a solid addition to their income-generating portfolios.
Solid financials
In the most recent quarter, the company increased its dividend by 14%. In fact, the company has a really strong history of dividend increases. Since 2012, the dividend has grown at a cumulative average growth rate of 18% from $0.14 per share in 2012 to $0.32 currently.
Revenue increased 17% to $153.1 million, and this was due to the acquisition of AFX, which contributed $28.5 million of this increase. Exco acquired AFX back in April 2016 for US$73 million, and this acquisition is complementary to Exco’s interior trim business; management expects it to be highly accretive to earnings.
On to cash flow. The company also has a good history of generating solid free cash flow numbers. In the latest quarter, the company generated free cash flow of $18.3 million for a very attractive free cash flow margin of 12%.
Additionally, Exco has been able to achieve strong margins. In the latest quarter, the company posted an operating margin of over 11%, similar to Linamar Corporation’s (TSX: LNR) operating margin and significantly higher than Magna International Inc.’s (TSX: MG)(NYSE: MGA), which came in at 7.7% in its latest results.
Let’s also look at return on equity (ROE) — a metric investors should always look at because it shows us how effective a company is at creating profit from our (shareholders’) money. Exco Technologies ranks very well on this measure as well. In 2016, the company generated an ROE of 17.2%, which compares to Magna’s ROE of 21.8% and Linamar’s ROE of 21.5%.
Balance sheet remains strong
The company has $38 million of cash and cash equivalents on the balance sheet, a debt-to-total-capitalization ratio of 19%, and a net debt to trailing EBITDA of a very healthy 0.3 times.
Attractive valuation
The shares trade at a P/E ratio of 9.4 times with an expected earnings-growth rate (based on consensus analyst expectations) of 12% in 2017 and 13% in 2018. This compares to Magna’s P/E ratio of 8.5 times and expected earnings growth of 6% in 2017 and 9% in 2018, and Linamar’s P/E ratio of 7.6 times and expected earnings growth of 18% in 2017 and 1.2% in 2018.
Finally, Exco Technologies’s current dividend yield is a very attractive 3%, and this dividend is easily covered. In fact, the company has been successful at covering and maintaining its dividend throughout its history, despite the fact that its business is a cyclical one.
