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Davis + Henderson, founded in 1875, is a the provider of cheques for many Canadian banks. Many think cheques are dead but I can say it isn’t just yet. Sure the business has been impacted by online transactions and Davis + Henderson has been re-inventing itself along the way. While the cheque business is slowing down other financial electronic services are booming up and DH has been stepping up to provide such services.
D+H = Financial Technology as outlined on their website. Their business segments are as follow:
- Payment Solution Services which still includes the cheque business
- Lending Solution Services which focuses on the mortgage industry
- Real Estate Services which is their foray outside the financial industry and a complement to the mortgage business in a way
I have outlined the primary business target of each business segments but they all include some basic general services for any sort of companies such as the Life insurance sector with claim services as an example. I recommend reading their Investor Fact Sheet.
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DH Quick Facts
- Stock Ticker: DH
- Market Cap.: 1.26B$
- P/E: 17.84
- Forward P/E: 12.94
- P/B: 1.83 (Price to Book)
- P/S: 1.7 (Price to Sale)
- P/CF: 6.76 (Price to Cash Flow)
- EPS: $1.20
- Beta: 0.92
- Liabilities to Equity Ratio: 0.85
- Quarterly Dividends: $0.32
- Dividend Yield: 6.00%
- Dividend Payout Ratio: 49.61%
- ROE: 10.01%
- 10 Year EPS Growth Average: 11.35%
- 10 Year Dividend Growth Average: 0.58%
- 52-Week Low: $16.17
- 52-Week High: $22.00
- 52-Week Range: 88.34%
DH Dividend Growth
Davis + Henderson used to be an Income Trust and provide a juicy yield to the investors but on January 1, 2011, it had to convert to a corporation. At the time of conversion, the question all investors had around their income trusts is if the dividends would be sustainable after they convert. Most income trusts were paying dividends from their cash flow and benefited from a better tax treatment.
The drop in dividend is due to the change to a corporation. I believe for many income trusts, it was the sensible thing to do unlike other companies such as Yellow Media. The drop in dividends you see is the result of the conversation which makes looking back at 10 years of data a little hard as DU only has 2 years under its belt as a corporation.
A $5,000 investment 10 years ago would be worth $19,045.60 today. It would have doubled twice 
Both the stock appreciation and the dividend yield had a major impact in delivering this performance. The number of shares acquired through dividends early have allowed for a fast compound growth.
Year | Dividends | Growth | Stock Price | Shares | Dividends | New Shares | Value |
|---|---|---|---|---|---|---|---|
| 2002 | $1.32 | - | $12.80 | 390 | $514.80 | 40 | $4,992.00 |
| 2003 | $1.36 | 3.03% | $17.45 | 430 | $584.80 | 33 | $7,503.50 |
| 2004 | $1.40 | 2.94% | $22.30 | 463 | $648.20 | 29 | $10,324.90 |
| 2005 | $1.45 | 3.57% | $23.19 | 492 | $713.40 | 30 | $11,409.48 |
| 2006 | $1.50 | 3.45% | $14.97 | 522 | $783.00 | 52 | $7,814.34 |
| 2007 | $1.72 | 14.67% | $20.75 | 574 | $987.28 | 47 | $11,910.50 |
| 2008 | $1.80 | 4.65% | $16.04 | 621 | $1,117.80 | 69 | $9,960.84 |
| 2009 | $1.84 | 2.22% | $16.77 | 690 | $1,269.60 | 75 | $11,571.30 |
| 2010 | $1.84 | 0.00% | $20.04 | 765 | $1,407.60 | 70 | $15,330.60 |
| 2011 | $1.22 | -33.70% | $16.74 | 835 | $1,018.70 | 60 | $13,977.90 |
| 2012 | $1.28 | 4.92% | $21.28 | 895 | $1,145.60 | 53 | $19,045.60 |
DH Dividend Payout Ratio
The dividend payout ratio, just like the dividends, needs to be reset as of January 2011. The historical data is based on an income trust with a different tax and distribution model. The new corporation is now sitting at a 49% dividend payout ratio which is comparable to the banks. Considering it derives its business from the banks, it appears to be a prudent ratio. I would prefer to see it slightly lower than the banks as it needs to stay ahead of the banking needs and the competition.
DH EPS Growth
Amid the change to a corporation, the EPS has grown over time showing the company is able to re-invent themselves and continue to be a service provider for the banks. Two years is not a lot of data though. The growth would be coming from the continuous financial services and acquisitions outside the core business segments which is what they have been doing.
Thoughts
Davis + Henderson, DH stock ticker, is an investment I would consider for my RESP account as it fits 3 criteria I must have: stability, reliability & higher yield. I don’t see massive growth but rather a continuous growth. The financial sector requires stringent business rules and regulations which makes it difficult for new competitors to emerge quickly. It therefore provides DH with a competitive advantage when it comes to servicing the financial industry in Canada.
- Stability: I don’t see the stock price going through any roller coaster ride.
- Reliability: The company’s services are all tied to banks and the mortgage industry which is not going anywhere any time soon.
- High Yield: At 6%, I consider an investment a high yield which usually limits stock appreciation.
I do find it price a little high and would prefer a P/E of 15 with a value target around $18. Although the forward P/E is established at 12.94 based on future earnings and that’s something to consider.
Readers: Are you interested in DH? What’s your take on their future growth?
Full Disclosure: No position in DH at the time of writing.
Disclamer: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your decision at your own risk – see my full disclaimer for more details.
Great analysis!
I following DH since some months now, but the stock price is out of reach for me too, I missed the good times to buy it in 2012.
Anyway, that will be for the next correction perhaps (Obama and Bernanke if you read this…)
@farcodev
What’s your buy price?
@TPIE
Not far from yours: at max $19.10, lower the better of course.
According to my not-too-perfect-but-OK valuation spreadsheet the stock isn’t undervalued anymore above it.
[...] Passive Income Earner provided a detailed and thorough analysis of Davis + Henderson Corp. Davis Henderson is another one of those high yield Canadian stocks that used to be an income trust. [...]
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