Revealed: This Hidden Gem Dividend Stock Is Incredibly Cheap

I’ve been investing for more than 20 years and I’m not sure I’ve ever felt more like a dinosaur.

Many investors have decided to absolutely hate the boring stodgy value stocks that have been such successful investments over the years. My utility stocks, banks, and REITs continue to struggle while the so-called “Magnificent 7” tech stocks continue to make all-time highs.

This trend has temporarily reversed itself in the last couple of weeks as the NASDAQ has sold off some 5%, but it’s hard for tech bears to take a victory lap when the ten-year chart of the largest NASDAQ ETF looks like this:

(For the record, your author is no tech bear. He’s bearish on paying anywhere from 30-100x earnings for tech)

What this attitude has done is created some excellent opportunities in these unloved sectors. Old-school economy stocks in Canada are trading at decade-low valuations, as I highlighted in a couple of Twitter threads that were collectively viewed about 200,000 times:

I guess I’m not the only one who thinks there are decent opportunities in value stocks today.

These lists were filled with solid, boring, blue-chip Canadian stocks that are unloved right now as so-called “total return” investors load up on sexy growth stocks trading at 10-year high valuations.

I’ve been investing long enough to realize that buying even great companies at ultra-high valuations often ends in tears. Investors justify high valuations until they don’t, and it all comes crashing down.

I continue to think the play today is to buy the unloved part of the market, companies that are quietly delivering solid results behind the scenes. And since these stocks come with attractive dividends, the waiting isn’t so bad. Those dividends can be reinvested into more shares, other cheap opportunities, or, in the case of early retirees like myself, spent on life.

Today I’d like to take a closer look at one such stock, a company that offers:

• A dirt cheap price-to-earnings and price-to-free cash flow ratio

• Shares that trade at a massive discount to replacement cost of the assets

• In an industry with high barriers to entry

• Which essentially controls its main market (a very quiet monopoly)

• With underrated growth potential

• And a succulent, 5%+ dividend (with dividend growth potential)

Let’s take a closer look.

An under-the-radar stud

I won’t bury the lede. Today’s stock is Algoma Central (TSX:ALC), a specialty shipping company that primarily operates in the Great Lakes region.

But Nelson, isn’t shipping a crummy business?

Intercontinental shipping sure is. It’s plagued with issues like operators overbuilding when times are good and then being forced to service all that debt when times are bad. There are virtually zero barriers to entry. It’s a commoditized business, so all customers care about is price. And if that’s not enough, every now and again the industry’s biggest input cost (oil) explodes higher, costs that are not easily passed onto customers.

Algoma’s business is much different. It virtually owns Great Lakes shipping in North America, controlling a key route for commodities like grain, iron ore, road salt, and cement. These are predictable markets between customers that need steady supply of product, meaning Algoma Central can sign long-term contracts with customers that give it protections against things like inflation and fuel costs.

Let’s look at one example. Every year Western Canadian farmers grow grain, canola, mustard seed, and so many other food products. These products are loaded onto special ships Algoma has designed for just this purpose and eventually exported to South America, Europe, and Africa.

This is a steady business that should grow slowly over time as Canadian farmers gradually increase their crop yields.

Algoma has taken what it learned from Great Lakes shipping and applied it to markets around the world. It has grown the business by focusing on:

• Niche commodities

• With predictable routes

• That offer long-term contract potential (up to 10 years)

• Shipping mostly boring, steady commodities with steady demand

• For solid, blue-chip companies who have been around a long time

• Who value on-time service and stability over the lowest bid

• On ships that are often custom designed for the purpose

This is much different than the typical shipping business, yet Algoma trades at the type of valuation that is usually reserved for a commodity player with no pricing power.

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One of Canada’s cheapest stocks

Algoma has been consistently profitable for 70+ years and has grown earnings steadily over the last decade. Yet it trades for under 7× 2024’s projected earnings and just over 8x this year’s expected free cash flow.

That’s historically cheap. Here’s the stock’s P/E ratio over the last decade:

There’s another metric that personifies just how cheap Algoma Central is. Despite the company spending aggressively in the last decade to replace its aging fleet, the stock (including debt) still trades at a 50%+ discount to the replacement value of its ships.

Remember, much of Algoma’s fleet is specially designed ships that are specifically designed to ship these commodities. These are long-term assets with significant value which are expected to be in service for decades. And, as a bonus, they’re much more fuel efficient than the ships they replaced, which improves overall profitability.

In other words, Algoma Central is priced as if it’s going out of business, but the company has long-term growth potential.

One avenue Algoma has to increase earnings is to win more contracts. It has entered into a 50% partnership with FureBear, which will deliver 10 new vessels between now and 2026. These ships will be put to work in niche shipping markets in Europe — serving customers like including oil refineries, wholesale distributors, and large consumers of petroleum products. These ships will also be significantly more fuel efficient versus the competition, which is a massive advantage.

The company also has a demonstrated record of growing its bottom line, especially over the last decade. In 2014, the company generated $473M in revenues and $49M in earnings. That works out to $1.22 per share in earnings. A decade later, in 2023, the company had revenue of $721M with $83M in earnings, or $2 per share.

2023 was a bit of an off year because it wasn’t a great year for Western Canadian farmers. Analysts are more bullish for this year, telling investors they can expect revenues of $762M and profits of $2.15 per share. They continue to be bullish over the medium-term future, saying profits are expected to hit $2.35 per share in 2025 and $2.68 per share in 2026.

Remember, this is a $14.32 stock. It’s insanely cheap, especially when we consider the potential earnings growth.

Bonus dividends

Algoma Central also offers one of the better dividends out there. The current yield is 5.3% and it is well covered by earnings. The payout is approximately 40% of 2024’s projected earnings.

That alone would be a great payout for those of us who are looking for juicy dividends. But it gets better. 

Firstly, the payout has grown pretty nicely over time. The annual dividend was $0.28 per share back in 2014. It’s currently $0.76 per share. That’s a 171% increase in the last decade. And with such a low payout ratio I think the dividend raises continue — although maybe not as quickly as the previous decade.

There’s more. The company also pays out periodic special dividends, including:

• $0.75 per share in 2019

• $2.65 per share in 2020

• $1.35 per share in 2022

Combine that with regular dividends, and Algoma paid out $9.29 per share in dividends from 2014-23, or some 65% of its current share price. 

It paid out those generous dividends while increasing its long-term earning power and keeping its balance sheet in fine shape. In other words, it got more valuable despite paying out such generous dividends.

The bottom line

I could go on about Algoma Central all day long.

I haven’t even touched on some other advantages the stock offers — like the long-term benefit of having a controlling shareholder that has held for 50+ years. But it’s okay. I think y’all understand why I’m excited about the opportunity.

The problem, of course, is such a stock is the opposite of sexy in today’s world. If Nvidia is stock version of Taylor Swift in a miniskirt, Algoma Central is the equivalent of Susan Boyle. It just isn’t popular. Or appreciated. Or even acknowledged.

I think that changes, and stodgy dividend stocks will be once again appreciated. It’s that simple.

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