Sometimes you just stumble upon interesting stocks when you dig through the mass of companies that make up the TSX index. There are a number of companies worth checking into that have excellent balance sheets and decent dividends. The next step for investors after discovering these companies is to make sure that their growth prospects and upside potential justify making an investment.
One company that might be worth considering for your portfolio is Pason Systems Inc. (TSX:PSI). The company is a technology company that operates in the oil industry. Its main business is providing business management systems for oil rigs, enabling communication, and data transmission and compilation from the rigs to the office.
The company has a diversified business model with five distinct revenue segments: Drilling Data, Mud Management and Safety, Communications, Drilling Intelligence, and Analytics. Each of the segments experienced double-digit growth over the previous year, as more rigs have begun to come back online with rising oil.
Due to increased oil rig activity and U.S. business revenue, Pason delivered excellent results in the first quarter of 2018. Total revenue increased 25% over the previous year, and basic earnings per share increased 81%. Funds flows from operations, one of the major indicators of profitability in the oil sector, increased 61%.
Free cash flow, while still positive, was down 34% over the period, although this was primarily attributed to the 400% increase in capital expenditures during the quarter. R&D was primarily focused on machine learning algorithm, software, and analytics development. The company expects R&D to slow somewhat in the second quarter.
The company’s balance sheet is what really makes this a stock to consider. Pason has enough cash on its books to pay down all of its liabilities three times over. The company’s cash hoard has only grown over the years, and this cash growth occurred during a period where business was relatively slow.
Pason pays a dividend of over 3% at the current price — a dividend the company had raised several times before the oil price collapse, which occurred a few years ago. Since that time, the dividend has been held steady but has never been cut. The fact it was never cut, combined with the company’s excellent balance sheet, provides some confidence that the dividend will remain steady, or perhaps even rise if oil prices continue to strengthen.
While most people think of investing directly in the producers, Pason offers an interesting way to invest in the oil sector in a less capital-intensive and lower-risk way. The company is still exposed to oil prices, as the last couple of years have proven. Lower rig counts mean less business for the company. But Pason is a technology company and, as such, does not have the same capital risk that a producer faces.
Pason’s excellent balance sheet, interesting business model, and solid dividend makes this one oil-sector-related stock worth looking at if oil prices continue to march upwards.
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 Kris Knutson has no position in any of the stocks mentioned. Pason is a recommendation of Stock Advisor Canada and Dividend Investor Canada.