Canadian investors seeking out monthly dividend stocks can certainly be wooed by a good-looking dividend yield. That’s exactly what many investors might think when they take a look at the Yellow Pages (TSX:Y), only to turn their heads thinking, “Wait, this book is from the 90s?”
Yet don’t be so quick to act, either on the buy or sell side. There are quite a few things to consider if wanting monthly dividend income from a dividend stock like the Yellow Pages. So let’s look at those items and see if it’s a solid buy on the TSX today.
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About Y
The phone book company is no longer part of ancient history. Today, the dividend stock is a small-cap digital marketing firm helping small and mid-sized Canadian businesses advertise online. It sells website hosting, search engine optimization tools (SEO), lead generation services and more. It’s essentially a low-cost, one-stop shop for small businesses that don’t have digital market expertise or the budget.
Revenue comes mainly from subscription packages sold to these small businesses. That makes it a pure cyclical play on the health of the Canadian small-business economy. It also explains why its revenue has been declining since 2015, as other companies have taken on this area of the economy, including Alphabet and Shopify.
Earnings have reflected this, with Y reporting $51.7 million in revenue, down 4% year over year. This has been in consistent decline for years, with management aiming to manage the decline profitably by cutting costs faster than the fall in revenue. Yet despite this, the dividend stock remains profitable, with net income at $3.3 million and debt nearly eliminated. In short, sales are shrinking, but the balance sheet remains rock solid.
The income
So let’s look at what investors could gain from this dividend stock. Y offers a $1 annual dividend per share, about 8.9% as of writing! The payout ratio is on the high end of 89%, but it is manageable. And the dividend has been stable since being reinstated in 2019 after years of restructuring. Now with no debt on hand, it doesn’t look like a cut is likely anytime soon, though an increase looks unlikely as well.
Now what about value? At writing, Y trades at 9 times future earnings and enterprise value over earnings before interest, taxes, depreciation and amortization (EBITDA) of 3.8. Both of these look very cheap compared to most digital peers. Yet with sales dropping, it’s basically worth whatever cash flow the dividend stock can generate over the next decade.
And that decade comes with immense competition, with the company operating in a structurally shrinking market. Ads are dominated by companies like Alphabet, so the company will have to keep up its edge of customer service and simplicity. In the meantime, management remains vigilant, with former CEO David Eckert transforming the balance sheet after coming on board in 2017, now guided under CEO Sherilyn King.
Bottom line
So, is Y worth it for the dividend yield? In short, that’s up to your portfolio and risk aversion. The high yield is backed by strong free cash flow and disciplined management. Yet long term, there is a slow but steady decline. Overall, this is one dividend stock that will need to earn its keep in any portfolio.
