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An Overlooked Dividend Stock in the TSX Index With Big Upside Potential

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Investors often go to the most popular names when considering dividend stocks for their portfolios, but there are many attractive companies in the TSX Index that pay good dividends.

Let’s take a look at an under-the-radar stock that might be an interesting pick today.

Russel Metals (TSX:RUS)

Russel Metals is one of the largest metals distribution companies in North America, with operations that include metals service centres, energy products, and steel distributors.

The company generated strong Q2 2018 results with revenue of $978 million compared to $817 million in the same period last year. Net earnings more than doubled to $66 million, and earnings per share rose to $1.07 compared to $0.52 in Q2 2017. Free cash flow, which is important for dividend investors, increased to $87 million from $44 million.

Revenue in the metals services centres increased 35% on a year-over-year basis, supported by a 9% jump in same-store tonnes shipped and a 17% increase in the average selling price. As a result, gross margins rose from 21.6% in Q2 2017 to 25.5%.

The energy products segment was largely responsible for the stock’s plunge during the oil rout, but a recovery is underway. Revenue rose 8% compared to Q2 last year and gross margins improved to 20.9% from 18.7%.

Steel distribution revenue slipped 9% in the quarter compared to Q2 2017, as customers delayed orders due to trade concerns. This should be a short-term event, and the broader picture looks good for the segment. Rising prices drove margins up to 26.8% from 19% in the same quarter last year.

Overall, Russel reported its best results in a decade.

The company pays a quarterly dividend of $0.38 per share. At the time of writing, that’s good for a yield of 5.2%.

Should you buy?

The stock has bounced around over the past year, as investors try to figure out how tariffs might impact the company. Russel has significant operations in both Canada and the United States, so it has the ability to make adjustments as required, and that is showing up in the numbers.

Based on the Q2 results and the overall strength of the Canadian and U.S. economies, the company appears to be in good shape, despite trade uncertainties. The stock has nearly doubled off the 2015 low near $15, currently trading at $29 per share. In 2014, the share price topped $36, so more upside could be on the way.

Russel Metals might not be the most exciting company in the TSX Index, but it offers above-average yield and a shot at some decent upside gains in the coming years. If you have some cash on the sidelines, the stock looks attractive today for a buy-and-hold dividend portfolio.

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 Andrew Walker has no position in any stock mentioned.

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