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US Housing Largesse Crosses the Border

07/02/2013 9:00 am EST

Focus: GLOBAL

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

This company is benefiting from the rebound in the US housing market, says Gordon Pape of The Canada Report.

It's a common practice in Europe for companies to pay variable dividends based on the bottom line. When companies do well, investors are rewarded. When times are tough, the pickings become lean.

It's a double-edged sword from an investor's perspective. You may receive an unusually high payout one year, only to see the amount cut by 50% or more the next.

For anyone requiring steady, dependable cash flow it's a nightmare. For those who can live with the ups and downs, it's an opportunity.

Norbord (Toronto: NBD) is a Toronto-based international provider of wood panels. It operates 13 plants in Canada, the US, and the UK, and employs 1,900 people. Annual sales are about $1 billion, making it one of the world's largest producers of oriented strand board (OSB). Other products include particleboard, medium density fiberboard (MDF), and related value-added products.

CEO Barrie Shineton said he expects demand to exceed supply for the rest of this year, adding that the average North American price for OSB reached its highest level in nine years, during the quarter. Although prices pulled back about 15% in April, RBC Capital Markets said in a research report that they are expected to trend higher this month before the traditional summer season slowdown.

Norbord is one of only a few North American companies to take a variable dividend approach. On April 30, the company announced the board of directors had approved a variable dividend policy that targets the payout to shareholders of a portion of expected future free cash flow through the cycle.

For 2013, the dividend is targeted at 60 cents per share quarterly, which amounts to an annualized payment of $2.40 per share. With the stock trading at $34.05, that amounts to a very healthy yield of 7% over the next 12 months, assuming that rate can be maintained.

In announcing the move, the company said its liquidity position is improving, with cash of $158 million on the balance sheet and undrawn bank and securitization lines of $342 million at the end of the first quarter (figures in Canadian dollars).

"The company's balance sheet is deleveraging quickly, with net debt of just $285 million, representing 37% of total capitalization, and rapidly approaching the bottom of the company's target range over the cycle," the announcement said.

Norbord is in a highly cyclical business, but right now its sales and profits are on the upswing, thanks in large part to the improvement in the US housing situation. The company reported first quarter earnings of $67 million ($1.26 per share, fully diluted), compared to break-even in the first quarter of 2012 and $38 million (76 cents per share) in the fourth quarter of last year.

Because of its cyclicality, Norbord is not a typical income stock. However, investors who can handle the risk may want to add it to their portfolio, not just for the current high dividend, but also for the capital gain potential.

RBC has a $40 target on the share price. But remember, this is not a buy-and-hold stock. If you decide to purchase shares, keep a close eye on them and on the economic cycle. When the current upsurge in the US housing market appears to be peaking (which could be a few years away) take your profit and exit.

Norbord is a buy for aggressive investors at the current price.

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