Get 7% Yield From Just Energy
Summary The company’s business model does not depend on commodity prices. Energy demand is quite inelastic, providing consistent returns for Just Energy. Strong cash flows can support the dividend going forward. Just Energy (NYSE: JE ) is a retailer of electricity, natural gas and green energy. It is headquartered in Canada, but has operations in the United States, Canada, and the U.K. Utility companies like Just Energy are usually shielded from commodity volatility. This enables them to deliver superior returns even when commodities underperform. Despite this characteristic, the shares slid 35% from its 2014 high to a price of $5.23 today. This is providing you with the opportunity to snatch up the shares at a yield of 7.4%. Of course, a higher yield often means that investors are apprehensive about the viability of future distributions. Today we are going to analyze whether you should share this concern. The Business Just Energy was able to grow its revenue by 11% and operating profit by 7% in FY 2015. This follows a trend of steady growth since 2012. The factor contributing to the stable growth is the company’s business model. The company essentially earns a margin on its “products,” much like a typical retailer. It purchases energy from suppliers, and then profits from the difference between the purchasing price and what customers are willing to pay. Hence, commodity fluctuations do not play a huge role in the company’s operation. Because demand for energy is relatively inelastic from a consumer’s perspective, Just Energy should be able to consistently deliver returns in the future. The Financials Currently the company has 146.6 million shares outstanding, which translates to roughly C$73 million in expected dividends annually. High cash flows are critical for dividend investors. In FY 2015, the company generated C$96 million from operations, meaning that the coverage ratio is 1.32x. This is fairly decent, but there are better news. The company’s working capital accounts increased by C$44 million in FY 2015, while this eroded operating cash flow for the year, typically the same changes will not occur next year, sometimes they can even be reversed. For example, in FY 2014, the working capital accounts decreased by C$46 million, resulting in an inflated operating cash flow; this year the opposite has occurred. I estimate that the long-run average cash flow from operations should be C$140 million when it is adjusted for working capital changes. This will comfortably cover the current level of distribution. If we turn our attention to capital expenditure, we will find a positive number for FY 2015. Of course, this is not the norm. What caused the “negative” capital expenditure is the sale of its water heater unit in 2014. The core capital expenditure was only C$43 million, which was amply covered by the operating cash flow. Conclusion Given Just Energy’s stable business model, the company should be able to generate consistent returns in the future. Due to its strong cash flow, it is unlikely that dividends will go away any time soon. If you are an income investor looking to add a long-term holding, Just Energy may be worth your consideration. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
