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Property owner building base for good dividend stock

It's time we stopped using the S&P TSX index to measure the health of the stock market. It's deeply flawed. For starters, it goes down way too often. How is that helpful?

Not all stocks are going down though. Dividend stocks are stealthily rising - some of them, anyway. Look at BCE or Atco (both recommended in this space, I hasten to add). Investors apparently want to own companies that send them cheques every three months or so.

Stocks that might pay dividends are also doing relatively well. You wonder why more companies don't. Take Mainstreet Equity, a real estate concern out of Calgary that focuses on smaller rental properties.

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The company has about 10 million shares outstanding and a market cap of $110-million.

Although most of its buildings are in places where the local economy is sensitive to commodity prices - Alberta and Saskatchewan, notably - the company has done surprisingly well. It emerged from the recession in better shape than it went in by some measures, generating enough cash to buy back four million shares.

And while it has a very good record of buying and occasionally selling properties, it's been a laggard operationally, with stubbornly high vacancy. But that's changing too, and fast: the vacancy rate fell to 10 per cent from 19 per cent last year. Mainstreet's business model means it will always have a relatively high vacancy rate but it was higher than necessary before management rolled up its sleeves and beat it down to much more profitable levels. It's still falling fast.

Funds from operations on a per-share basis are rising nicely, up 36 per cent in the nine months to June 30, to 45 cents.

By and large, things are looking up for this company, whose stock I own. Most investment dealers that cover it rate it a "strong buy" with big upside.

I think it should pay a dividend. The company can probably generate 80 cents a share of cash in relatively short order. Despite having spent $26-million buying back stock last year, it has $6-million in the bank.

And it can finance unmortgaged properties and refinance existing debt to put another $60-million in the coffers - in total, that's more than $6 a share. Plus it's generating a growing stream of cash flow. I think it could pay a dividend, and I'm not alone.

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TD Newcrest says Mainstreet could pay a 34-cent dividend in 2011, giving the stock a roughly 3-per-cent yield using today's price. "A dividend would be a positive catalyst for the stock," says the analyst, whose target is $14. The stock is $11 now.

Buying back more stock isn't really an option. CEO Bob Dhillon owns about 40 per cent of it and the float is already pretty thin.

Mr. Dhillon doesn't rule out a dividend, but he seems reluctant to go in that direction now (technically, it's the board's decision, but he's chairman and major shareholder so he has veto power). He says he wants to finish stabilizing his units (that is renovating them), get rid of rental incentives that are running at $4-million a year, spend some money on maintenance and squeeze some more rent out of his properties. (Mainstreet's business model is to buy up low-rent buildings, spruce them up and raise the rents.) More importantly, he wants to acquire more properties when prices are low and financing is cheap. He says he can borrow five-year money for less than 3 per cent and prices are softening.

But if so, why did the company buy back four million shares? That buyback didn't stop Mainstreet from buying buildings.

"Because it was the best use of cash at that time, when the stock was about $6. Now the best use is to bulk up," he says.

I think he could do it all, and I suspect he might. It would be good for the stock price.

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About the Author
Investment Columnist

Fabrice Taylor, CFA, publishes the President’s Club investment letter, for which he and The Globe and Mail have a distribution agreement. More

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