Is Algoma Central Corp. (TSX:ALC) a Value Investor’s Dream?

Canada has a number of smaller, dividend-paying stocks that are worth taking a look at. But many of these companies are in commodity or financial related sectors. Finding dividend-paying stocks outside of these two areas can be tricky, but they do exist. Algoma Central Corp. (TSX:ALC), while it does have exposure to commodities, is a shipping company that might be worth digging into.

The company’s first-quarter results weren’t great, but this is generally the case, as it operates in Canada. (Most of the water it sails on is frozen at that time of year). This is also the time of year when many of its ships are in dry dock for maintenance, thus lowering its profitability. Full-year results are often a better indicator of total profitability for it, but comparing Q1 year over year results still yields some interesting information.

The cold winter did a number on shipping volumes, with crop shipments decreasing by 86% over the previous year. This was offset by its salt shipments for which winter did increase demand. The company reported a net loss in Q1, as it did in the same period the previous year. What’s interesting is that the loss narrowed from a loss of $0.50 a share to $0.19.

With rising commodity prices, demand for Algoma’s services has been rising.  The first quarter 2018 revenues increased 16% year over year. The increase did not include its global revenues, which increased significantly due to the increased service form new international vessels. Algoma’s share count was another bright point, falling by almost 400 thousand shares as the company used cash to buy back its arguably undervalued stock.

With its dividend currently sitting at around 2.5%, it’s not the largest dividend that Canada has to offer. Algoma went through a stretch during which the dividend wasn’t raised, but the company has recently begun to raise it once again.

For a smaller company, Algoma has a lot to offer. However, there are a couple of risks that any potential investor should keep in mind. The most significant risk is the fact that the company has a significant amount of commodity exposure. During the commodity route of 2014-16, Algoma’s share price dropped considerably. A large portion of its revenues comes from commodity shipments, so it makes sense that price reductions would limit cargo being shipped.

The second major risk is its debt. While the company has enough cash to cover its short-term obligations, its cash level has dropped in recent years, while long-term debt has stayed fairly high. Most of this debt was taken on to finance the purchase of its new ships, which in turn should generate revenue over the long-term, but one should always monitor a company’s debt, especially when that company has a significant amount of exposure to commodities.

Algoma is an interesting stock to keep in mind, especially with the talk of trade wars. In the event of rising trade tensions, a stock like Algoma might fall, providing an even more attractive entry point. The company has been building its international fleet, so buying in at a lower price might work out well over the long haul. Trading at 13 times earnings and below book value, the company is definitely not expensive and warrants a look.

Algoma has been around for a long time and continues to be an excellent operator. It’s already trading at a low valuation, and may become even more attractive of market prices fall. Just remember, however, that when buying shares of this company, it pays to look at full-year results and not just the quarter because of the impact of seasons on profitability.