EnerCare Inc

I do not own this stock (TSX-ECI). This used to be Consumers Water Income Fund (TSX-CWI.UN) and it converted to a corporation as EnerCare (TSX-ECI). In 2010, it dropped its distributions by almost 50%. Prior to becoming a corporation, they did have some distributions increases. Also, a hopeful sign is that they have increased the dividends by 1.9% for the first one due to be paid in 2012.

One of the problems I see is that they are not making much in the way of earnings. They earned just $.01 in 2010 and are expected to earn just $.10 this year. Next year, analysts expect that earnings will turn negative. They are paying out, of course, more than they are earning. This tends to affect the book value, which has gone steadily down. (Over the past 5 and 10 years, the book value has been decreasing at the 14% and 13% level each year.)

Decrease in Book Value is generally due to paying out more in dividends than the company can afford too. This certainly appears to be the cases over the last few years. To me it is not a good sign that they increased the dividends. I personally prefer companies that do not payout dividends when they cannot afford them. However, management may feel that earnings and cash flow is looking up when the analysts do not see this.

Their Dividend Payout Ratios as regards to cash flow has been much better. The 5 year median DPR for cash flow is 44% and is expected to be in the range of 30% this year and next year. However, cash flow has not been growing over the past 5 and 7 years. It has just been going up and down. It hit its peak in 2008, which really coincides with the latest bear market, so they may do better in the future.

If you had been invested in this stock, you would not have made much money over the past 5 years as the total return is around 1.5% per year. This is in spite of the fact that the dividends earned during this period was around 8.6% per year. However, if you held the stock for 10 years, you would have made a total return of 10.2% per year. The dividends would have been around 11% per year, so you would have lost in capital gain, but got a return in distributions.

The bright point is there has been a modest increase in revenue. The revenue has increased over the past 5 and 10 years at the rate of 6.8% and 6% per year, respectively. The revenue per share has increased over the past 5 years at the rate of 4.8% and 4.5% per year, respectively.

When I look at insider trading I find very modest insider buying and no insider selling. Basically the CFO and officers have more options than shares. This is not true for directors and CEO. Some 16 institutions own 20% of the stock of this company. Over the past 3 months they have only bought more shares and have increased their shares by around 12%.

There are not many analysts following this stock. The analysts’ recommendations I found where Strong Buy, Buy and Hold. The consensus recommendation would be a Buy.

I cannot not get a fix on a Price/Earnings Ratio because of this company’s lack of earnings. The Graham price is going down and is currently at only $2.30. The stock price at $9.60 is some 317% higher. The 10 year median high difference between the stock price and Graham Price is the stock price being 153% higher. This does not show a good stock price.

Since the book value has been moving down, the current Price/Book Value Ratio is, at 3.93, a rather high value. Also this is some 78% above the 10 year median P/B Ratio of 2.21. The current dividend yield at 6.88% is lower by 38% of the 5 year median dividend yield at 11.2%. In other words, my usual stock price tests do not help too much.

One report I found with a buy, gives a 12 month stock price of $10.00. The report was looking at EBITDA margin and Free Cash flow. See Investopedia for a definition of EBITDA margin. Also, see Investopedia for a definition of Free Cash Flow.

A number of analysts mentioned the very good dividend. Also a number mentioned that some regulatory constraints will come off next year and this should help the profitability of this company. A couple of Hold recommendations were made because the recent run up in stock price.

I do know that my stance that company should pay out dividends only as they can afford to could play havoc with my income. However, my experience has been that my dividend income overall has always increased, even though some companies I hold decrease, suspend or do not increase their dividends. I think this is because I have a variety of companies and they are not all in the same business cycle at the same time. I also realize that companies are often heavily punished when they decrease dividends or suspend them, but I find this action illogical. I am a long term investor and I want my companies to act prudent for the long term health of the companies I invest in.

EnerCare Inc owns a portfolio of waterheaters and other portfolio assets, which they rent to primarily residential customers. They rent out waterheaters in the GTA and southern Ontario. EnerCare also owns EnerCare Connections Inc., a leading sub-metering company, with metering contracts for condominium and apartment suites in Ontario, Alberta and elsewhere in Canada. Its web site is here EnerCare. See my spreadsheet at eci.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.