As the market continues to appreciate north and south of the border, finding value becomes more difficult. This year alone, after including dividends, the TSX is up almost 15% while the S&P 500 has gained more than 10%.
Finding value is less difficult when searching for companies less closely followed by Bay Street. One good example is Dorel Industries. The company was once best-known for its juvenile segment that produced infant products. In the last several years, it’s worked to grow its bicycle division, most recently with a sizable acquisition in Brazil.
Dorel currently trades at 9x its 2015 earnings, which is a discount to the 11.5x ratio it traded at a decade ago. Furthermore, the stock offers investors a 4% yield, which is significantly better than the 1.7% offered by a 5 year Canada bond. If the past is indicative of the future, investors can expect this dividend to grow. In fact, management has increased it by 160% since the recession in 2009. With a mere 35% payout ratio, there is further room for growth.
I predict the company will continue to grow by acquisitions. In August 2013, Dorel bought a 70% stake of Caloi, the largest bicycle manufacturer in Brazil that commands a 40% market share. This added to an already significant share in the bike business that came through acquiring Cannondale in 2008. This past June, a Chinese juvenile business was purchased.
While Dorel integrates these acquisitions in future quarters, earnings will grow and its stock price should follow. In the meantime, investors are being paid to wait by collecting the 4% dividend yield.
Clients of Baskin Financial Services are shareholders of Dorel Industries. This author also owns the stock personally.
