Canadian investors looking for monthly dividend stocks can certainly be enticed by a nice dividend yield. That’s exactly what many investors might be thinking when they look at the Yellow Pages (TSX:Y), then they turned their heads and thought, “Wait, this book is from the 90s?”
But don’t be so quick to act, either on the buy or sell side. There are quite a few things to consider if you want monthly dividend income from a dividend stock like Yellow Pages. So let’s take a look at those items and see if they’re a solid purchase TSX Today.
About Y
The phone book business is no longer part of ancient history. Today, Dividend Stock is a small digital marketing company that helps small and medium Canadian businesses advertise online. It sells website hosting, search engine optimization (SEO) tools, lead generation services, and more. It’s essentially a low-cost, one-stop shop for small businesses that don’t have the digital market expertise or the budget.
Revenue comes primarily from subscription packages sold to these small businesses. That makes it a purely cyclical play for the health of Canada’s small business economy. It also explains why sales have fallen since 2015 as other companies have taken over this part of the economy, including Alphabet And Shopify.
Earnings reflected this, with Y reporting revenue of $51.7 million, down 4% year over year. This has been declining steadily for years, with management aiming to manage the decline profitably by cutting costs faster than the decline in sales. But despite this, the dividend stock remains profitable, with net income of $3.3 million and virtually eliminated debt. In short: turnover is shrinking, but the balance sheet remains rock solid.
The income
So let’s take a look at what investors could gain from this dividend stock. Y offers an annual dividend of $1 per share, approximately 8.9% at the time of writing! The payout ratio is on the high side of 89%, but manageable. And the dividend has been stable since it was reinstated in 2019 after years of restructuring. With no more debt, it doesn’t look like there will be a reduction anytime soon, although an increase also seems unlikely.
What about the value now? At the time of writing, Y is trading at 9 times forward earnings and enterprise value above earnings before interest, taxes, depreciation and amortization (EBITDA) of 3.8. Both look very cheap compared to most digital peers. But with sales down, it’s actually worth the cash flow the dividend stock can generate over the next decade.
And that decade is accompanied by enormous competition, with the company operating in a structurally shrinking market. Advertising is dominated by companies like Alphabet, so the company will need to maintain its lead in customer service and simplicity. In the meantime, management remains vigilant, with former CEO David Eckert transforming the balance sheet after coming on board in 2017, now led by CEO Sherilyn King.
In short
So, is Y worth it for the dividend yield? In short, it depends on your portfolio and risk aversion. The high return is supported by strong free cash flow and disciplined management. Yet in the long term there has been a slow but steady decline. Overall, this is a dividend stock that should make its money in any portfolio.
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