Should You Buy Stock in the Finance Minister’s Family Biz?

Bill Morneau is getting out of Morneau Shepell Inc. (TSX:MSI), his family business, on account of conflict-of-interest allegations. Should you take his place?

Finance minister Bill Morneau is currently in the process of selling the remaining shares he or his family owns in Morneau Shepell Inc. (TSX:MSI) as a result of conflict-of-interest allegations.

Morneau worked at his dad’s company from 1987 through 2015, when he resigned as the company’s executive chairman after being elected a federal Member of Parliament.

Formerly a pension benefit consultant, Morneau Shepell has grown into a much bigger company, offering large companies all kinds of human resources solutions.

Bill Morneau is getting out. Should you be getting in?

The company’s stock’s having a good year and is up almost 18% through November 1 — more than double the TSX Composite Index. Historically, it’s been a winner, besting the index in seven of the last 10 years. Since its IPO in September 2005, it’s achieved a cumulative total return of 215% — also more than double the index.

The question is if it will keep performing over the next decade or more.

It’s gone through a lot of name changes over the years, as it’s morphed from W.F. Morneau & Associates in 1966 to Morneau Sobeco in 1997 and finally to its current name in 2011 after converting from an income trust.

Whatever name it’s gone by, it’s always seemed to perform for investors by generating strong organic and recurring revenue growth and not by acquisitions, which seems odd given the number of name changes.

Consistent growth

Morneau Shepell has grown revenue every year from 2007 to 2016. More importantly, it’s revenue them by 17% annually; not to be outdone, operating income also grew by 17% per year over the same period.

Knocking its consistency is hard.

For income investors, it currently provides a dividend yield of 3.7% — one of the better dividend yields on the TSX. It’s averaged a dividend yield of 6.7% over the past decade, while delivering double-digit capital appreciation makes it twice as deadly; it’s the kind of stock you want to buy and never sell.

In its most recent quarterly report announced in August, Morneau Shepell delivered 7.7% revenue growth to $160.8 million, along with a 7.8% increase in adjusted EBITDA to $31.8 million.

As I mentioned previously, it’s done an excellent job growing revenue organically. Through the first six months of the year, only $6.2 million of its $318.7 million in revenue came from acquisitions; the rest was home-grown growth.

On November 1, it announced that it was acquiring Pro Health Group, a Quebec City-based provider of employee and family-assistance programs (EFAPs). Like many of its bolt-on acquisitions, this one is meant to add to its existing strength in Quebec.

Any downside?

Well, as Fool contributor Susan Portelance recently suggested, its stock doesn’t come cheap, trading at 37 times current earnings and a low 8.6% return on equity.

However, based on the 2018 consensus analyst estimate of $1.02 per share, its forward P/E is more like 21 — a much more reasonable valuation.

Furthermore, Fool contributor Joseph Solitro reminded readers in October that Morneau Shepell is a good cash flow generator — $71 million in fiscal 2016 and $34 million through the first two quarters of 2017 — and therefore it will have no problem continuing to pay its attractive dividend.

Bottom line on Morneau Shepell

Conservatively financed with just $247 million in long-term debt or 22% of its market cap, Bill Morneau’s error in judgment has brought a lot of attention to a stock that tends to fly under the radar.

Don’t let this mistake by the finance minister dissuade you from buying Morneau Shepell stock. That’s especially true if you’re an income investor.

Fool contributor Will Ashworth has no position in any stocks mentioned. Morneau Shepell is a recommendation of Dividend Investor Canada.

More on Dividend Stocks

jar with coins and plant
Dividend Stocks

TFSA Income: 2 High-Yield Dividend Stocks for Retirees to Consider Now

These industry leaders now offer dividend yields near 6%.

Read more »

middle-aged couple work together on laptop
Dividend Stocks

Hey Planners: A 3.2% Dividend Stock to Build Your 2027 TFSA Contributions Around

Fortis Inc (TSX:FTS) stock can add considerable income to your TFSA.

Read more »

man in bowtie poses with abacus
Dividend Stocks

To Collect $150 a Month From Granite REIT, Here’s the Investment You’d Need

Granite’s current monthly distribution requires 508 units, or about $43,119, to reach a $150 monthly income target.

Read more »

Person holding a smartphone with a stock chart on screen
Dividend Stocks

For BCE vs. Enbridge, a 5.7% Yield vs. 5.9% (And the One I’d Prefer for Income)

Both BCE and Enbridge offer attractive income, but BCE is a higher-risk turnaround opportunity, whereas Enbridge offers a more predictable…

Read more »

man shops in a drugstore
Dividend Stocks

How Much to Invest in RioCan for $300 a Month in Dividends

How much should you invest in RioCan for $300 a month in dividends? Explore its retail business, monthly payout and…

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

Telus Dividend Safety: Is the Stock Still Worth Buying for Income?

Explore the latest insights on Telus dividend amid a challenging earnings report and management's new Transformation Strategy.

Read more »

voice-recognition-talking-to-a-smartphone
Dividend Stocks

BCE Just Reported: What $10,000 Could Earn You in Dividends Today

BCE is yielding a very generous 5.2%, as the company's telecom business improves and long-term investments drive growth.

Read more »

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

Is Intact’s Rough Quarter a Blip or the New Normal for Canadian Insurers?

Intact reported $660 million in pre-tax catastrophe losses during the quarter, which dragged its net operating income per share lower.

Read more »