Light at the End of the Tunnel for this Construction Company with a 7% Dividend Yield
Everything was going well for Aecon Group, the Toronto-based construction and infrastructure development company, until last year. After all, this was the same company that China attempted to buy for over $20/share back in 2017. The fed blocked the deal, so it never closed.
Aecon has many projects on the go, and four of them become problems. Because they were structured as “fixed cost” (as opposed to “cost plus”) projects, higher costs have sent the Eglinton LRT, Finch LRT, Coastal Gaslink, and Gordie Howe Bridge way over budget.
Because of this, it’s the only thing anyone has focused on the last few quarters.
On April 26, the stock fell 12% to $12.27/share following disappointing earnings.
On July 27, the stock fell 16% to $10.44/share following another bad earnings report. This was when we bought the stock for clients.
On October 26, the stock fell 12% to $9.26/share. This time, however, three insiders bought too. As of this writing, the stock has rebounded almost 20% to $10.91/share.
Admittedly, it’s impossible to predict quarter to quarter what the cost overrun will be for these four troublesome projects. Last quarter, Aecon recognized a $91.1 million operating loss (way above the analyst estimates). And that’s even worse than the quarter before when an $81 million loss was recorded.
But, there’s light at the end of the tunnel.
Each day, these four troublesome projects are moving closer towards finishing for good.
First, the Coastal Gaslink project is now mechanically done. Second, completion for both the Eglinton LRT and Finch LRT is expected in 2024. Fourth, the Gordie Howe Bridge in Windsor should be off the books in 2025.
Today, Aecon has a $6.2 billion backlog of projects to be complete in the future. Of that amount, 8.5% is currently attributable to these four problem projects, which is down from 10% the previous quarter. By the middle of 2024, it will drop further to 4-5% of the project backlog.
Because this is all anyone is focusing on, the underlying company is being ignored. Excluding these four elephants in the room, things are going quite well. In fact, while its margin was a paltry 2.6% in the most recent quarter, it would have been 11.6% after excluding the four problem projects.
Once the four projects roll off, investors will see the strength of Aecon’s underlying operations and buy the stock in droves.
While we wait for that to happen, the dividend is paying our clients handsomely. The yield is 6.8% right now. In the last decade, the company increased that dividend by 9% each year. As interest rates begin to fall in 2024, we believe stocks with attractive yields will become more sought after by investors seeking income.
The strength of Aecon’s underlying business, which will become more transparent in 2024 as projects facing cost overrun complete, as well as the attractive dividend in a soon-to-be falling interest rate environment make this stock one of our favourites to own.
-by Jeff Pollock
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