Canadians with a long-term horizon can consider investing in undervalued stocks that trade at a discount to their intrinsic value. It’s crucial to identify a portfolio of quality companies that have the potential to deliver outsized gains to shareholders over time. Here are two such absurdly cheap stocks to buy and hold for years.
Stella-Jones stock
Valued at $4.8 billion by market cap, Stella Jones (TSX: SJ) is among North America’s largest providers of pressure-treated wood products. It supports the infrastructure required to deliver electrical distribution and transmission and the operation and maintenance of railway transportation systems.
Stella-Jones supplies electrical utilities and telecom companies with wood utility poles and railroad operators with railroad ties and timbers.
In the last decade, the TSX stock has more than tripled investor returns after adjusting for dividend reinvestments. It pays shareholders an annual dividend of $1.12 per share, translating to a forward yield of 1.3%.
In the first quarter (Q1) of 2024, Stella Jones reported revenue of $775 million, up 9% year over year, driven by organic sales growth in infrastructure product categories. Its Q1 EBITDA (earnings before interest, tax, depreciation, and amortization) stood at $156 million, up 30% year over year, indicating a margin of 20.1%.
Stella-Jones aims to invest between $65 million and $75 million annually in capital expenditures to maintain the quality of its assets. It has allocated an additional $25 million in the next two years to support growth in the utility poles product category and is focused on pursuing accretive infrastructure-related acquisitions that enhance its strategic positioning.
Stella-Jones has raised its dividends by almost 15% annually in the last 10 years, enhancing the effective yield significantly. Priced at 14.7 times forward earnings, the TSX stock is quite cheap and trades at a discount of 10% to consensus price target estimates.
Toromont Industries stock
Another cheap TSX dividend stock that pays shareholders a dividend is Toromont Industries (TSX: TIH). Valued at $9.6 billion by market cap, Toromont operates through two business segments which include Equipment Group and CIMCO.
The Equipment Group business includes one of the largest Caterpillar dealerships by revenue and geographic territory. It also includes rental operations and a material handling business. CIMCO is among North America’s largest suppliers of thermal management solutions that enable customers to reduce energy consumption and emissions.
Since June 2014, Toromont Industries stock has returned over 400% to shareholders in dividend-adjusted gains. The company increased bookings by 62% year over year in Q1 of 2024. Equipment Group bookings rose due to several large orders in mining and construction while CIMCO bookings were up on solid product and services demand.
It ended the March quarter with an order backlog of $1.4 billion, up from $1.1 billion in the year-ago period.
Priced at 18.8 times forward earnings, Toromont Industries trades at a 15% discount to consensus price target estimates. It pays shareholders an annual dividend of $1.92 per share, indicating a yield of 1.6%. These payouts have more than tripled in the last 10 years.
The two TSX stocks have an enviable dividend-growth profile and trade at a compelling valuation in June 2024.
