By simply observing Finning International’s (TSX: FTT) stock price over the last five and 10 years versus the Canadian stock market, investors can easily spot that it is an above-average volatile stock.
Over the last five years, Finning stock beat the Canadian stock market with or without dividends. The charts below exclude dividends and cash distributions as an illustration of the volatility of the stock.
FTT and XIU five-year data by YCharts
However, over the last 10 years, it underperformed the market. This goes to show that investors seeking to invest in the stock should be more picky about when to buy and sell.
FTT 10-year data by YCharts
Cyclical stock
Indeed, Finning International is a cyclical business. Over multiple years, its adjusted earnings typically move like a roller-coaster ride, going up and down. For instance, in 2008 and 2009, adjusted earnings per share fell 49%. In 2014-16, its earnings fell 55%. During the pandemic year of 2020, its earnings dropped 31%.
However, in other years, it experienced earnings growth — sometimes double-digit growth. This means that its earnings are sensitive to economic expansion and recession. So, for patient investors, the cyclical stock is likely an excellent buy for a multi-year turnaround on drops of over 40% from a high.
Now is not the safest time to buy the stock. However, over the next three to five years, it could still deliver total returns north of 10% per year.
Dividend stock trading at a fair valuation
Although a cyclical company, Finning International has maintained a safe and growing dividend. According to the Canadian Dividend All-Star List, the company has paid growing dividends for 22 consecutive years with a three-, five-, 10-, 15-, and 20-year dividend-growth rates of 6.3%, 4.5%, 5.1%, 5.7%, and 8.9%, respectively. Its payout ratio is estimated to be sustainable at about 25% this year.
Its dividend yield is almost 2.4% at writing. Its dividend growth, especially in recent years, hasn’t been spectacular. So, again, it signals the importance of buying the stock when it’s down and cheap for the long term.
At $42.07 per share at writing, it trades at about 10.7 times earnings. According to TMX Group’s analyst consensus 12-month price target of $47, the stock trades at a discount of over 10% and is considered to be fairly valued.
The business
Headquartered in Surrey, British Columbia, Finning International is the largest dealer of Caterpillar equipment. It sells, rents, and provides Caterpillar equipment, parts, services, and performance solutions in Western Canada, Chile, Argentina, Bolivia, the United Kingdom, and Ireland.
Last year, Finning generated $10.5 billion in revenue, resulting in a three-year growth rate of 19%. Operating income growth in the period was north of 28% per year, arriving at $933 million in 2023. It also achieved net income growth of 31% annually, leading to 2023 net income of $523 million. Investors should recognize this period as a tremendous turnaround post-pandemic.
Investor takeaway
To summarize, Finning International is a cyclical dividend stock that offers decent long-term returns potential of north of 10%. It’s reasonably valued and offers a safe dividend, yielding close to 2.4% today and has the will and ability to continue increasing its dividend.
