The last couple of months have seen a massive spree of buying in the technology space. The last month has also seen a lot of volatility in the oil and energy sector, as the world still hasn’t gotten back its appetite for oil. In the midst of all these heavyweights, it was easy to lose sight of a hardworking stock that continued plodding away at its core business and steadily delivered value to its shareholders.
Stella-Jones (TSX: SJ) is not a stock that will jump out and make people take notice. It is a stock that passes under the radar of most investors, but it is also a stock that doesn’t disappoint. It is a leading manufacturer of pressure-treated wood products. Stella-Jones supplies products to railroad operators (railway ties and timber) and telecom and electrical utility companies (electric poles), and it provides timber for the housing market.
What’s driving the TSX stock higher?
Stella-Jones reported a record second quarter, as railway ties and utility poles made up 59% of its business. Together, these businesses accounted for sales of $455 million, up from $410 million in the same quarter of 2019. All three businesses (railways, telecom, and utilities) have to regularly replace railway ties and utility poles for safety reasons. This ensures that Stella-Jones will get a regular business, resulting in steady and predictable cash flows.
However, Stella-Jones’s 2020 results are going to receive a massive boost due to the increase in demand in residential housing and do-it-yourself home improvement timber sales. The second quarter of 2020 saw residential lumber sales go up from $195 million in 2019 to $257 million, an increase of 32%.
By all accounts, demand for residential lumber has gone up in the third quarter of 2020. In fact, there is a shortage of lumber, as contractors struggle to contain the impact of the pandemic. According to the Canada Mortgage and Housing Corporation, housing starts in July were 15% higher than in June.
This led to a massive demand for lumber, but a lot of mills had suspended operations during the lockdown and were unable to meet demand. Further, a lot of homeowners used the lockdown to work on their homes, which has led to a higher-than-usual demand for lumber for home improvement projects. In 2019, residential lumber sales accounted for 25% of Stella-Jones’s revenues. This year, these numbers should be a lot higher.
The Foolish takeaway
I have regularly written about this stock, recommending investors buy it, and it has always delivered. When I wrote about it in April, it was trading below $30. Today, it is trading 50% higher. It has steadily gained pace on the back of good results and good cash flows.
A dividend of 1.33% isn’t juicy enough for income investors, but when you look at the dividend growth over the years, you understand why this is such a good stock to have in your portfolio. The company has been paying dividends every year since 2010. That year it paid an annual dividend of $0.09. Its dividend compound annual growth rate is 21% over the last decade.
