Montreal based Stella-Jones (Toronto: SJ) is one of the leading producers of pressure-treated wood products in North America, supplying electrical utility poles and railway ties (laid under the rail tracks) and timbers, explains Gavin Graham, contributing editor to The Income Investor.
It also manufactures and distributes residential lumber to retailers for outdoor applications as well as industrial products for construction and marine applications. Finally, it harvests and sells logs and lumber.
SJ has grown through a series of tuck-in acquisitions over the last 15 years and recorded its nineteenth year of revenue growth in 2019, to $2.2 billion. The company has demonstrated an ability to grow its revenues and earnings on a consistent basis, both organically and via acquisition.
Its largest and second-largest divisions, utility poles ($779 million in sales in 2019) and railroad ties ($678 million), comprised over 65% of its $2.169 billion of revenues and are both very stable with flat to 5% revenue growth annually on average and with long-standing relationships with their customers.
Industrial products ($128 million sales) are also stable and grow 5%-10% annually, while residential lumber ($472 million sales, down 3% in 2019) and logs and lumber ($112 million, down 28%) are more volatile but can be very profitable when the housing market is growing fast as in 2020. SJ has consistently earned low to mid-teens margins and returns on equity.
SJ has increased its dividend for 15 years in a row, most recently by 7.1%, to $0.15 a quarter, giving it a yield of 1.35%. The dividend has increased six times over the last decade from $0.10 in 2010.
SJ is for investors willing to accept an initially lower yield for a well-managed, consistently profitable and steadily growing industrial company. SJ offers participation in two of the main beneficiaries of increased infrastructure spending (utilities and railroads) while giving exposure to the booming U.S. housing market.
Action now: Buy. The share price has risen 20% in the last year but is still 12% below its price five years ago, while sales EBITDA and net income are at least one-third higher than in 2015.
