“The Olympic Builder that Doubled Its Dividends”

By Travis Johnson, Stock Gumshoe, October 22, 2009

Well, this seems to be the week for the Canadian Income Trusts, so let’s get ’em all out there in the open — this is yet another one from Roger Conrad, if you’d like to see the articles on some of his other dividend picks from earlier this week they’re here and here.

Today’s however, is quite a bit different — it’s a construction company that is operated as an Income Trust (though you wouldn’t know it to look at their website), and it has a substantially lower yield than many of the resource-related trusts, but also a decent backlog and probably an easier transition to corporate (ie, tax-paying) status to make than many of the huge dividend payers … meaning, they might be able to keep going with a similar dividend and not have to slash it once they start paying taxes. Or at least, that’s a possibility.

So how is this fella teased?

“The Olympic builder that doubled its dividends. A trailblazing pioneer in “sustainable” design, this trust was tapped to build a revolutionary new sports complex for the 2010 Vancouver Olympics. But this top-flight trust’s expertise goes well beyond design. They’ve got their hands into everything from oil sands mining to school construction to diesel desulphurization to syncrude plants to nuclear cooling towers. And since Canada is set for a sweeping infrastructure rebuild, this trust should be a prime beneficiary.

“While many businesses languished in the 4th quarter, this trust saw its revenue surge 31.5%. And shareholders saw their dividend check double.

“There are seven huge, new, projects now underway plus an order backlog worth $1.2 billion—everything from a massive water treatment plant to oil sands expansion to university flex-space housing. This rock-solid trust was added to our portfolio just three months ago—it’s already jumped over 100%.”

Well, we can jot this down as yet another stock that I regret not thinking about back in March — this is Bird Construction Income Fund (BDT-UN in Toronto, BIRDF on the pink sheets), a big engineering and construction firm that builds everything from syncrude processing plants in the tar sands to athletic arenas (the Olympics one teased is the Thunderbird hockey arena, innovative for accessible and green design) to apartment complexes to Wal Mart supercenters. They operate across Canada, having just last year acquired Rideau Construction, which has a big presence in the eastern provinces.

And unusually for an income trust, they don’t pay out all that much of their earnings — I’m not sure how they get away with this, it must have something to do with booked earnings versus distributable cash flow, but they’ve had booming earnings in recent years and paid out far less than half of those reported earnings as distributions. So although the distribution yield looks fairly small compared to many trusts at about 5.5%, they do have a lot of cash and earnings power that’s not reflected in that distribution yield.

The dividend has been raised this year, from 12 cents to 15 cents/month, so it now stands at an annual $1.80. The only way we can make the dividend doubling part of the teaser fit is if we go back to 2007 — which, given the propensity of these guys to reuse material, is certainly feasible (they paid a 9 cent/month dividend through 2007, then at the end of the year increased it to 12 cents and added a special dividend to get it to close to a double for that last month). And if Conrad really picked this one “several months ago,” his subscribers are probably pretty happy — it bottomed out around $10-12 (in US dollars) in November and March and is now near its highs at about $32 (US again — that’s a bit over C$33).

This one still looks like it might be fairly appealing, but there are some “ifs” in there — if oil prices fall again there are likely to be a lot of postponements in the tar sands and general Alberta development, which would take a chunk out of their order backlog that does stand at over a billion dollars, and they have gotten a fair amount of attention for building spikes related to infrastructure stimulus, tar sands oil projects, and the Olympics, so while the company appears to have plenty of cash and the ability to maintain a pretty diverse portfolio of projects, there is always some potential that they’re in or near the peak of their earnings power if there aren’t additional catalysts to come if those three peter out eventually. I wouldn’t be that concerned, personally, but I also don’t own the shares. Bird currently trades at a PE ratio of about 7, and a Price/Sales ratio of about .5 … that’s a fairly typical price/sales ratio for construction companies, but a below average PE ratio, which might mean that they’re able to wring out higher margins, or just that they enjoy the benefit of being a trust and not paying corporate taxes.

As with many similar teasers, the clues are a little bit old but close enough that I’m pretty sure I’m right — they did report a 31.5% surge in sales, but it was in their third quarter release in 2008 (OK, so they released those earnings during the fourth calendar quarter, I suppose so he can get by on a technicality).

Bird Construction is a bit of a tough company to follow — they don’t get a lot of investor press attention, and they don’t actively share info, it’s all on SEDAR (the Canadian version of the SEC’s Edgar for public company filings), but you don’t get the nice financial snapshots from most of the big financial portal sites — the best data I’ve seen for these guys is from Morningstar, you can access it free here. They have certainly had excellent earnings growth over the last four quarters, and the stock has enjoyed big runs up to this level in each of the past two years, so they’ve got some momentum on their side but we’re definitely not catching it at the bottom here. When will they convert to a corporation, and will they keep a similar dividend when they do? The company’s being pretty quiet about that so far.

I like the stock after my first perusal, but even though it looks fairly inexpensive I’m inclined to be patient and see if it comes in a bit after this huge rally — what do you think?

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...