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Extendicare: Good income stream, limited growth potential
9/22/2018 11:30:42 PM
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Gordon Pape writes on common-sense wealth-building strategies.



By Gordon Pape  | Monday, September 10, 2018


 

BUILDING WEALTH WITH GORDON PAPE
 

Caring for seniors is not an exciting business, but it is well-positioned demographically. As the population ages, more people need assisted support, either in retirement residences or in their own homes. One of the Canadian leaders in this field is Extendicare (TSX: EXE), which has been providing these services for over 50 years. I recommend it for investors who are looking for above-average cash flow and are not overly concerned about capital gains. Here are the details. Prices are as of Sept. 6.

Extendicare Inc.
Trading symbol:
TSX: EXE
Type:
Common stock
Current price: $8.36
Annual payout: $0.48
Yield: 5.7%
Risk: Medium
Website: www.extendicare.com

The business: Extendicare is a leading provider of care and services for seniors throughout Canada. The company operates a network of 120 senior care and living centres (67 owned/53 managed), as well as providing home health care operations through ParaMed. It employs 23,700 people.

The security: I recommend the common stock of this company, which trades on the TSX under the symbol EXE. It is also available through the U.S. over-the-counter market, with the ticker EXETF.

Why I like it: The company can rely on steady income to fund its dividend, and the yield is a very attractive 5.7%. There is not much upside potential to the stock in the short term, but for those interested in cash flow, that should not be a serious problem.

Financial highlights: Second-quarter revenue was $279.5 million, up 2.1% from the same period in 2017. For the first half of the fiscal year, revenue was $550.9 million, a 1.5% increase.

Net operating income from Canadian operations was up 11.3%, to $36.3 million in the quarter, with a margin of 13% compared with 11.9% in the same period of 2017.

Adjusted funds from operations (AFFO) was $17.1 million ($0.194 per basic share), up $2.7 million from last year. For the first half, AFFO was $31.8 million ($0.360 per share), up $4.7 million. Dividends declared were $21.1 million, representing approximately 67% of AFFO. This indicates there is ample coverage for the dividend.

Risks: The stock can be volatile at times. Over the past five years, it has ranged from a high of over $10 to a low of close to $6. It is currently in the middle of that range. As with most high-yielding dividend stocks, it is sensitive to interest rate risk. Obtaining qualified staff, especially personal support workers, is an ongoing problem.

There is also some political risk. Regulation of nursing homes is a provincial responsibility, and governments provide significant funding. A cutback in a provincial budget could negatively impact Extendicare’s revenue.

Distribution policy: The shares pay a monthly dividend of $0.04 each ($0.48 per year).

Tax implications: Payments are eligible for the dividend tax credit.

Summing up: Good income, limited growth potential. That’s Extendicare in a nutshell. Ask your financial advisor if it is suitable for your account.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.

Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.

Notes and Disclaimer

© 2018 by The Fund Library. All rights reserved.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

BUILDING WEALTH WITH GORDON PAPE
 

 
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