If you review the top-performing Canadian stocks in 2022, energy stocks dominate. This year, the sector’s gain of 44.13% outpaced the 41.8% gain in 2021. Also, as of this writing, only four of the 11 primary sectors are in positive territory. Consumer staples (+12%), industrials (+4.86%), and materials (+2.11%) complete the advancers.
However, one name from the industrial sector is a certified winner. Element Fleet Management (TSX:EFN) is beating the broader market handily at +52.43% versus -6.01%. Moreover, investors’ interest in this dividend stock should heighten heading into 2023 following the enormous 29% dividend increase recently.
Brief business overview
Element Fleet Management is one of the world’s largest pure-play automotive fleet managers. The $7.58 billion company provides end-to-end fleet management services and solutions and has more than one million vehicles. Besides Canada, Mexico and the U.S., it caters to corporate, commercial, government, and public service clients in Australia and New Zealand.
Management takes pride in its blue-chip client base and scalable operating platform that has magnified revenue growth into earnings growth for years. The capital-light business model is still evolving and should enhance return on equity further. Moreover, Element Fleet desires to return a significant proportion of its resilient cash flow to shareholders via dividends and share buybacks.
Record financial and operating results
In the third quarter (Q3) of 2022 and year to date 2022, net revenue increased 19% and 15.3% year over year to $290.78 million and $839.72 million, respectively. After three quarters this year, net income reached $308.42 million, representing an 18% increase from the same period in 2021.
Its president and chief executive officer (CEO) Jay Forbes said, “Element powered through the many headwinds confronting businesses in 2022 to deliver record third-quarter results, a testimony to the resilience of our business model and the people that serve our clients so well.”
Management acknowledges that macroeconomic uncertainties, including rising interest rates, are threats, although the business model can withstand them. Notably, directly and indirectly, inflation contributes to Element’s profitable revenue growth. Another important measure of the business performance and future growth potential is vehicles under management (VUM).
Profitable organic revenue growth
As of September 30, 2022, VUM grew 3.9% year over year to 1,466,000. In Q3 2022, net revenue per vehicle and free cash flow (FCF) per vehicle rose 7.8% and 24.4% to $187 and $94 versus Q3 2022. Since 2021, Element has been leveraging its scalable operating platform and aggressively pursuing profitable organic revenue growth.
Management has identified five organic net revenue-growth drivers. The first is retaining existing clients and improving the 98% retention rate. Element aims to grow its share of the wallet (penetration, utilization, and pricing) and steal market share from competitors. The last two are converting self-managed fleets into Element clients and winning more government and mega fleets.
Element Fleet Management should be among the TSX’s top dividend-growth stocks soon. At $19.30 per share, the dividend yield is 2.07%. Management expects its common dividend to continue growing consistent with FCF per share growth. The ultimate goal is to make FCF a more significant component of Element’s return of capital strategy.