Most Canadians consider a stock’s dividend yield as the primary metric for investing. However, in addition to the dividend yield, it’s crucial to analyze several other factors, such as the company’s payout ratio, balance sheet debt, and potential for earnings growth.
One quality low-yield TSX dividend stock that has flown under the radar for more than two decades is TerraVest Industries (TSX:TVK). Valued at a market cap of $2.4 billion, TerraVest stock has returned 1,400% to shareholders since its initial public offering in July 2004. However, after adjusting for dividend reinvestments, cumulative returns are closer to 9,600%, which is exceptional.
Despite its market-thumping returns, TerraVest stock trades at a reasonable valuation in January 2025. So, let’s see why this dividend stock is set to beat the TSX again and again.
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The bull case of investing in TerraVest stock
TerraVest is a diversified Canadian manufacturer that has three primary business segments:
- Fuel containment: It produces equipment like LPG transport trailers, storage tanks, and residential furnaces.
- Processing equipment: It manufactures machinery for the energy sector, including wellhead processing equipment and various storage and transport solutions for natural gas liquids and ammonia.
- Services: The segment rounds out TerraVest’s operations with a fleet of service rigs supporting oil and gas operations in Saskatchewan. Together, these divisions serve critical infrastructure requirements across energy, agriculture, mining, and transportation sectors in Canada and the United States.
While TerraVest is not a household name, it dominates certain niche markets where competition is limited and entry barriers are high. It allows TerraVest to benefit from multiple moats, which translates to steady cash flow and earnings across market cycles.
Despite a challenging and volatile macro environment, TerraVest Industries reported revenue of $238.1 million, an increase of 58% year over year, in the third quarter (Q3) of 2024. Moreover, adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) and operating cash flow more than doubled year over year to $49.1 million and $45.3 million, respectively.
Over the last 12 months, TerraVest completed several acquisitions, which drove its revenue and earnings higher. In April 2024, it acquired AEPL, a tank trailer manufacturer. It also acquired a storage tank manufacturer and a water management services company in late 2023.
If we exclude these acquisitions, the company’s base portfolio grew by 14% year over year, driven by strong demand in the Services segment. Additionally, higher sales of compressed gas distribution equipment and increased demand for residential/commercial petroleum tanks contributed to the top line.
Is the TSX dividend stock overvalued?
These accretive acquisitions and a focus on cost initiatives enabled TerraVest to widen gross margins from 24.5% to 28.9% over the past year. TerraVest has consolidated manufacturing to improve efficiency while improving supply chain conditions, which have led to lower inventory levels.
Alternatively, lower sales in verticals such as furnaces, boilers, and oil/gas processing equipment are weighing heavily on near-term revenue.
TerraVest emphasized it has secured a new credit facility, positioning it for further acquisitions in 2025. Moreover, manufacturing efficiency improvements and cost synergies will help maintain earnings and cash flow growth.
TerraVest pays shareholders an annual dividend of $0.70 per share, which translates to a yield of 0.6%. With a payout ratio of just 9%, the TSX dividend stock has enough room to further increase the payouts.
Bay Street projects TerraVest’s adjusted earnings to increase from $3.29 per share in 2024 to $5.07 per share in fiscal 2026. If the TSX stock is priced at 40 times trailing earrings, it will trade over $200 per share in early 2027, indicating an upside potential of over 50% from current levels.
