The Simply Investing Dividend Podcast

EP53: Dividend Stock Analysis - Finning International

October 11, 2023 Kanwal Sarai Season 2 Episode 53
The Simply Investing Dividend Podcast
EP53: Dividend Stock Analysis - Finning International
Show Notes Transcript Chapter Markers

In this episode, learn how to apply the 12 Rules of Simply Investing to Finning International. See if this company passes or fails the 12 Rules, is this company worth considering or should it be avoided?

Also covered in this episode:
- Who is Finning International?
- Applying the 12 Rules of Simply Investing

Disclaimer: The views and opinions shared on this channel are for informational and educational purposes only. Simply Investing Incorporated nor the author and guests shall be liable for any loss of profit or any commercial damages, including but not limited to incidental, special, consequential, or other damages. Investors should confirm any data before making stock buy/sell decisions. Our staff and editor may hold at any given time securities mentioned in this video/course/report/presentation/platform. The final decision to buy or sell any stock is yours; please do your own due diligence. Stock buy or sell decisions are based on many factors including your own risk tolerance. When in doubt please consult a professional advisor. No advice on the buying and selling of specific securities is provided. All trademarks, trade names, or logos mentioned or used are the property of their respective owners. For our full legal disclaimer, please visit our website.

Speaker 1:

In this episode you get to see how I evaluate a dividend stock finning international. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. Keep in mind this is not investing advice. I am not an investment advisor, certified financial planner or broker. I am an educator and dividend value investor. Not buy or sell. Decisions are based on many factors, including your own risk tolerance. When in doubt, please consult a professional advisor. Let's get started. We are going to be looking at finning international this is a Canadian company and we are going to be looking at the 12 rules of Simply Investing and then making a decision as to whether or not this is a company that you should consider investing in. So keep in mind that our approach and my approach is to invest safely and reliably for the long term, regardless of what happens in the stock market. Our focus is on the dividend income rather than the stock price itself. So how do we invest safely and reliably? We do that by investing in quality dividend stocks. So not just any stock, but a quality stock, and not just at any price, but when the stock itself is priced low. So how do we know, when we are looking at a company, whether or not. It is a quality stock, and how do we know that it is priced low? So for that I have created what I call the 12 rules of Simply Investing. You can see them up on the screen now, and if you are listening to the audio version, not a problem. In this episode I am going to go through each of the rules one by one and apply them to our company in today's episode, which is Finning International. So let's get started. Finning International trades on the Toronto Stock Exchange, so it is a Canadian company. It is the world's largest caterpillar dealer, so the company sells, rents and provides parts and services for equipment and engines to customers in various industries, and this includes mining, construction, petroleum, forestry and a wide range of power system applications. The company offers articulated trucks, pavers, backhoe loaders, compactors and lots and lots of other types of equipment and vehicles. You can see them up on the screen here, so I am not going to read them all, but there is quite a bit of equipment that the company sells and rents and services as well. The company itself is 90 years old. It was founded in 1933. It is headquartered in Vancouver. Canada Currently has 12,452,000 employees, and the company operates not only in Canada, but South America, the UK and Ireland. So, for those of you that are interested, the stock symbol on the Toronto Stock Exchange is FTT for Finning International. So let's get started with the 12 rules. We are going to apply all of the 12 rules to this company and see if it is a quality dividend stock and see if the stock is priced low as of this recording. Of course, let's start with rule number one. Do you understand how the company is making money? If you don't skip it and move on to something else? Now, I forgot to mention this at the beginning, but in order for us to invest in any company, a company must pass all of the 12 rules of simply investing. So not just 9 out of 12 or 8 out of 12, but all of the 12 rules. If a company fails even one rule, we skip it, move on to something else. So let's get back to rule number one here. Do you understand how the company is making money? And in this case, in this episode, we are looking at finning international and, like I said before in the introduction, the company sells, rents and provides parts and services for equipment and engines to customers in various industries. This includes mining, construction, petroleum, forestry and power system applications. So, having read this, and if you're still unsure, I would recommend go to the company's website, take a look at what the company is doing. So you don't have to be a subject matter expert or a genius in understanding what the company is doing, but just a general understanding of how is this company making money. And so my general understanding is that the company sells and rents construction equipment and then they also provide parts and services and service the that equipment to the different industries that we just talked about. So for rule number one, I'm going to say, in my opinion, this company passes rule number one, so let's move on to rule number two 20 years from now will people still need its products and services? So again, now we focus on the industries that this company is in. And this company serves the mining industry, serves the construction industry, petroleum industry and the forestry industries. So, again, in my opinion, when I think about rule number two, this company, I believe, is going to be around for 20 years or more just because of the industry industries that the company is in. Those industries are still going to be around in 20 years and they're still going to require the type of equipment that finning sells and rents to them. So the company passes rule number two. Let's move on to rule number three Does the company have a low cost competitive advantage? So, in other words, we are looking for companies that are industry leaders in the industry that they're in. So take a look at the industry that finning is in. Its other main competitor in Canada is Tormund, so this is another Canadian company that is in the same industry. It is providing similar product and services. Now, if you look in Canada alone, this is it. These are the top two competitors in this industry. So each of them do have a low cost competitive advantage. They are giants in their industry in Canada and they are going to make it difficult for other companies to compete in this space. And they've been around for a while. Finning has been around for 90 years doing and offering the same product and services for 90 years. So they do have a low cost competitive advantage. And if you're in the construction industry or the mining industry or the forestry industry, these names are going to be familiar, the ones that you see up on the screen. And then, if we expand to the US, there's two other competitors in the US which are much bigger. But for now we're looking at a Canadian company. We're going to focus on the Canadian market, even though I did mention before, finning operates in South America, in the UK and in Ireland, and that also helps the company to have a competitive advantage over its competitors. So I'm going to suggest to you, and in my opinion, rule number three the company passes that rule as well. Let's move on to rule number four is the company recession proof? So again, we're going to go back and look at what this company is offering in the marketplace. So they are serving the mining industry, the construction industry, petroleum and forestry industries. Okay, now I know there's a big push about electric vehicles and everybody's moving to electric vehicles. Okay, but if you think about moving large amounts of cargo or products across the world, or even across Canada or the US these are very large countries, geographically very large you still have to move the products by airplane, by trains or ships. So planes, trains, ships, these I was going to say vehicles these vehicles still need to run on gas, on petroleum. Okay, we're not there yet with electricity, running large, gigantic cargo ships across oceans. So they will still require large amounts of petroleum. And if you look at plastics, plastics come from petroleum. They're petroleum based. So think about all the things in your house that are made out of plastic. Okay, now when we think about mining, this company is providing equipment that allows mining to happen. So the raw materials that come out of the earth, and these raw materials are used in everything From cell phones to computers, to refrigerators to vehicles. Everything you have in your house, most things you have in your house, can be traced back to minerals and whether it's metal, aluminum, silver, nickel all of these things that need to be mined. So when we are in a recession, of course construction tends to slow down. We're thinking about residential construction. That would slow down, you know. So when we look at sort of the forestry industry, like lumber, but there still are other products that come out of the forestry industry and it's not just lumber that we use for construction. So, given the fact that finning is operating in the mining industry and the petroleum industry and in construction, you know you can also think about infrastructure. So roads, highways, bridges, these are love buildings, commercial buildings, these are large projects that can only be built by the products and services that finning offers. So when we compare this to, let's say, a grocery store, it's probably not as recession proof as a grocery store is. It still is Kind of recession proof. Okay. So, given the industry in the sector that they're in, I'm gonna say rule number four is fine and this company passes rule number four. Now, if you disagree with me, that's fine, and if you think that the company fails rule number four, then skip it, move on to something else, move on to a different company in a different industry. But in this example, in today's episode, we are talking about finning and so far it's passed rule number one, rule number two, rule number three and for rule number four, I'm going to suggest that this company passes rule number four as well. Let's move on to rule number five. Is the company profitable? So rule number five is divided into two parts, five a and five b. Let's take a look at rule number five a first. So what we do here is we look at the average 20 year EPS growth Must be 8% or more. This is earnings per share. So let's take a look at the graph here. The last 20 years for finning. You can see that 2015 was not a good year. The company lost money. But keep in mind we're looking on the screen at a 20 year graph. So one or two, maybe even three drops Is fine, as long as the overall trend is that the company is profitable over the long term. And so over the 20 years we can see from the graph that it seems to be profitable. But we're not going to rely just on the graph, we're going to rely on numbers. So remember rule number five a the EPS growth. Average EPS growth over the last 20 years must be 8% or more. And when we look up the numbers for finning and we calculate the numbers, we can see that its 20 year average EPS growth is 29.7%. So the company automatically passes rule number 5A. Let's move on to rule number 5B the company must have at least eight increases in the EPS in the last 20 years. So again, we're going to go back to the same graph. We're going to look at the earnings per share over the last 20 years and you can see the earnings go up, they go down, they go up, then they go down, they go up, up and up. So we want to see at least eight increases and in fact we do and we don't. You could count on the graph if you wanted to, the number of increases, but we look at the historical data and we can see that the company has had has increased its EPS, its earnings, 13 times in the last 20 years. So the company passes rule number 5B. Let's take a look at rule number 6. Does the company grow its dividend? So what we do here is similar to what we did with the EPS we're going to look at the average 20 year dividend growth and it has to be 8% or more. If it's not, we skip it, move on to another company, right? If it's less than 8%, the company fails rule number 6. So for this, we're going to take a look at the company's dividend per share over the last 20 years and you can see on the screen that's a nice graph and it goes up year after year after year after year and continues to grow. So that's good. But again, we're not going to rely on the graph. The graph is just the visual way of seeing what the dividends have done in the last 20 years, but we're going to look at the hard numbers. So when we calculate the average 20 year dividend growth for finning, we can see that it is 8.54%. So the company passes rule number 6. Now for your information, the company has had, in fact, 21 years of consecutive dividend increases. Also, the company has been paying a dividend since 1990. So that's a fantastic track record. And I've said this before in previous episodes I can't tell the future. No one can tell the future. We don't know what's going to happen next year. Is the company going to grow the dividend or keep it the same or reduce it? We don't know. But when we look at the information here in front of us for finning, we can have a high degree of confidence that the company will increase its dividend next year and the year after that and the year after that, because the company has had a strong track record. So that's what gives us the confidence that the dividend will continue to grow. And if it doesn't, that's why we diversify. We don't put all our money in one company. We put our money in other dividend growing companies, right, but that's a different topic. We're not going to get into diversification right now. So let's continue with our rules. So the company passes rule number six. Let's move on to rule number seven. Can the company afford to pay the dividend? So what we do here is we look at the payout ratio, and the payout ratio must be 75% or less. If it's higher than 75%, then company's going to fail this rule. So if we look at finning, we can see that its payout ratio today is 28.17%, so it's well below 75%. The company passes rule number seven. And if you want more information on how to calculate the payout ratio, where to get the numbers, why 75% is a good number? I cover all of this in episode number two, so you can always go back and watch episode number two, and the entire episode is based on looking at the payout ratio. Ok, rule number eight Is the debt less than 70%. So what we do here is we look at the debt to equity ratio for the company. So here we're going to look at finning and we can see that its debt to equity ratio, as of this recording, is 39.59%. So the company passes rule number eight. Let's move on to rule number nine. Rule number nine says avoid any company with a recent dividend cut. So this is an easy one. What we do is we want to make sure that its current dividend, its annual forward dividend, is higher than the previous year dividend. We don't want to see the dividend going down. If it stays the same, it's fine. So greater than or equal to, that's fine If the dividend is less than it was the year before, then the company would fail rule number nine. In fact, we're fine with finning. You can see that its current dividend is forward. Annual dividend is $1 per share, and in the previous year it was $0.93 per share. So that's good. It means the company has increased its dividend, and so it passes rule number nine. Rule number 10, does the company buy back its own shares? And the short answer is yes. So what we do is we look at the number of outstanding shares today and we compare it to the amount of outstanding shares in the year before, and so there's less shares now than there was in the year before. So the company passes rule number 10. Rule number 11, is the stock priced low? Is it undervalued or overvalued? So this is very important. Now rule number 11 is divided into three parts A, b and C. So let's start with rule number 11A. So here we look at the PE ratio must be 25 or less, and we can see that for finning, the PE ratio today is 11.23. So the company passes rule number 11A. Let's move on to rule number 11B. Here we're going to look at the current dividend yield and we want to make sure it's higher than the company's 20-year average dividend yield. That tells us that the stock is priced low, historically low, and it's undervalued. So we can see that finning today, its current dividend yield is 2.51%, which, of course, is greater than its 20-year average dividend yield of 2.32%. So the company passes rule number 11B. Let's move on to rule number 11C. The PB ratio must be three or less, and the PB ratio today for the company is 2.44. So it passes rule number 11C. Now for more information about the PB ratio and how you can determine the price to book ratio. What is the meaning of the price to book ratio and why should it be three or less? Please go back and watch episode 52, where I cover the price to book ratio in a lot more detail in that episode. So so far we've covered rules number one to 11. And for those of you that are interested and I'm gonna talk about this a little later in the episode I've created the Simply Investing platform. So this is a screenshot from the platform itself. It's a web application that automatically applies the rules to over 6,000 companies in the US and in Canada. So here up on the screen, we are looking at the data for finning international. So this saves you a lot of time. So you don't have to calculate the payout ratio yourself. You don't have to calculate the long-term debt-to-acquity ratio yourself. All of the numbers are calculated for you. And if you start on the left-hand side of the table and move to the right, you can see we cover rules number 5A, 5b, rules number 6, 7, 8, 9, 10, rule number 11, a, b and C. So we have all of the rules calculated for you and all of the values are there. So a quick scan of this table from left to right will show you that this company, finning, passes all of the rules, from number rules number 5 to rule number 11. You're still responsible for rules number one to four, just like we covered at the beginning of this episode. Okay, last rule, rule number 12,. Keep your emotions out of investing. This is a hard one. This has nothing to do with the company. Has everything to do with you as an investor. In order to be a successful dividend investor, you need patience and discipline. Patience to ride out market downturns. So don't panic when stock prices come down and don't get greedy when prices are going up. So we wanna keep the emotions out of it. We don't wanna get attached to the stock price or get attached to the company. Follow the 12 rules. This is your checklist. It's a checklist of 12 rules and a company has to pass each and every one of these rules before you can invest in it. And that's where the discipline comes into. So don't fall in love with the company. Apply the 12 rules methodically, from one to 12. And if a company passes it, then you're fine and you should consider investing in that company if you want to. So patience and discipline is key for rule number 12. So what have we done in today's episode? We've applied the 12 rules of simply investing to Finning Finning International and we can see that it passes all of the 12 rules because we've gone through all the 12 rules one by one. So that's what I do. I've just taken you through my process of how do I determine whether or not to consider a company for investing or to skip it, and it's really easy. I use this checklist. It's a checklist of 12 rules. So does this mean that you should go out and invest in Finning today? And the short answer is no, and the reason is this data is only accurate as of this recording, so I don't know when you're gonna be watching this video. Six months from now, a year from now, the data will change. So what you need to do is apply the 12 rules of simply investing when you have money to invest and when you're ready to invest. So keep in mind this data that I've shown you today is only accurate as of this recording. And the second thing is you need to consider your portfolio. What stocks do you already own? How much money do you have to invest? Do you already have a lot of investments in this sector, in this industry? If you do, then Finning may not be a good fit for you. So you have to consider your existing portfolio, and I touched on this briefly. Diversification is key, so that's again another topic for another episode, but you need to consider diversification as well. So keep in mind our approach to investing is to invest safely and reliably, regardless of what happens in the stock market. Even when the market tanks, we wanna make sure that our dividend income is coming in and it's growing year after year. So how do we do that? We invest in quality dividend stocks when they're priced low. And how do we know when they're priced low and how do we know that they're quality stocks. Well, that's what we've covered in today's episode is the 12 rules of simply investing. So, for those of you that are interested, there's an online simply investing course that I've created and in that course there's 10 modules. It's self-paced. We cover the investing basics. In module two, we cover the 12 rules in detail with real life examples. In module three, I show you how to apply the 12 rules using a Google Sheet. You put the numbers in and the Google Sheet will automatically highlight the failures and highlight the passes, so then you know which companies to avoid, which ones to consider. In module 4, we look at the Simply Investing platform. Then we look at placing your first stock order. I take you step by step through that process. The next module is building and tracking your portfolio. Module after that is learning when to sell, which is just as important as knowing when to buy. The next module, especially if you have mutual funds and index funds in ETFs, is how to reduce your fees and risk. Module 9, I will give you your action plan to get started right away. And module 10, I answer your most frequently asked questions. And, for those of you that are interested, I did mention the platform before. So the Simply Investing platform is a subscription-based service. It is a web application. You log into it. It automatically applies these rules to over 6,000 companies in the US and in Canada every single day, so that's just a quicker way to get there. For the do-it-yourself investor, the course is the best place to start. For the person who doesn't have the time to go through the course and just wants to get straight into seeing if a company passes rules, the platform is the way to go. So for those of you watching or listening, write down the coupon code SAVE10SAVE10. This coupon code is going to give you 10% off of the course and the platform as well. If you enjoyed today's episode, please hit the subscribe button. There's new episodes out every week. Hit the like button as well, and for more information, take a look at our website, simplyinvestingcom. Thanks for watching.

Evaluating Finning International - Investing Rules
12 Rules of Simply Investing