John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
When I want to get close to nature, I like to go for a walk through the woods or take a dip in the lake. You won't find me ripping up the trails in a mud-splattered ATV or blasting across the water in a jet-propelled personal watercraft.
Partly, I don't want to die. But mostly, I just want to enjoy the serenity nature has to offer.
But judging by the soaring share price of BRP Inc. – maker of Sea-Doos, Ski-Doos, Can-Am all-terrain vehicles and other quiet-busting power toys – plenty of people don't share my predilection for peace and quiet.
Since the start of 2016, shares of the Valcourt, Que.-based company – formerly known as Bombardier Recreational Products – have surged about 87 per cent, boosted by new product launches, rising sales and better-than-expected earnings.
Last week, BRP posted first-quarter results that left analysts' estimates in the dust – its eighth earnings "beat" in the past nine quarters – and raised its guidance for the current fiscal year. The company also initiated a quarterly dividend of 8 cents a share.
Based on the company's recent strong performance, analysts say BRP's stock still has plenty of fuel in the tank.
"BRP is firing on all cylinders," said CIBC World Markets Inc. analyst Mark Petrie, noting that new products are contributing to market-share gains in snowmobiles, personal watercraft (PWC) and side-by-side vehicles (SSVs) – a class of off-road machine with seats for two, four or six passengers. The Maverick X3 (a dune buggy-like vehicle designed for off-road thrill seekers) and the Defender (a utility vehicle aimed at farmers, ranchers, hunters and the like) have been selling especially well, helping to counter soft demand for Spyder three-wheeled motorcycles.
In light of the buoyant first-quarter results, Mr. Petrie raised his 12- to 18-month price target to $42 from $34 and reiterated his "outperform" rating on the shares, which closed Tuesday at $37.22.
With BRP planning to increase production capacity for SSVs and PWCs by 20 per cent, "it doesn't appear the company expects its momentum to slow any time soon. Dealers we speak with seem to feel the same," said BMO Nesbitt Burns Inc. analyst Gerrick Johnson, who rates the shares "outperform" with a 12-month price target of $44.
Even after the recent run-up in the stock price, most analysts remain bullish. According to Thomson Reuters, of the 13 analysts who follow BRP, 12 have the equivalent of a "buy" or "strong buy" rating, with just one "hold" and no "sells." The average price target is $40.08. The shares currently trade at a multiple of about 16 times estimated earnings for the fiscal year ending next January, a valuation analysts consider attractive in light of BRP's growth prospects.
BRP's new dividend may seem insignificant, given that the annualized payment of 32 cents equates to a minuscule yield of about 0.9 per cent. But the initiation of a dividend is still important because it reflects the company's confidence and "will likely attract new groups of shareholders to the story," Desjardins Securities Inc. analyst Benoit Poirier said in a note.
Indeed, companies such as Dollarama Inc., Starbucks Corp. and Apple Inc. that initiated dividends went on to produce impressive returns for shareholders. What's more, years after initiating a dividend, these companies have continued to raise their payments regularly.
"The paying of a dividend reflects tangible evidence of the underlying financial strength of a company," Charles Carlson, chief executive officer of Horizon Investment Services in Hammond, Ind., says in The Little Book of Big Dividends. "Once a company initiates a dividend, it doesn't want to cut it two quarters later. So there's a confidence factor that the company is going to be able to continue to generate the cash flow needed to support that dividend."
There is one group of investors that will benefit immediately from BRP's new dividend. The company's controlling shareholders – the Beaudoin-Bombardier family and Bain Capital, which together own nearly two-thirds of BRP's shares – stand to receive about $5.8-million a quarter.
With BRP also announcing a $350-million share repurchase, there is speculation that Bain could use the buyback to reduce its stake in the company. BRP became a separate entity in 2003 when Bombardier Inc. sold its recreational-products division to investors including Bain and the founding family. BRP was taken public in 2013.
Does all of this mean investing in BRP is a slam dunk? No. For one thing, recreational vehicles are a discretionary purchase and demand is sensitive to economic cycles. The strong U.S. economy and solid international sales have given BRP a nice tailwind, but if economic growth stalls and unemployment rises, consumers will be less likely to shell out thousands of dollars for recreational vehicles. Competition is another risk; BRP's new models are in favour now, but if consumer tastes change or a competitor such as Polaris Industries Inc. launches a product that wins back market share from BRP, the stock could hit the brakes or go into reverse.
It's worth noting that, prior to the recent run-up in BRP's share price, the stock had posted double-digit declines in both 2014 and 2015. Polaris's stock has also had a rocky ride of late, plunging about 40 per cent in the past two years.
Certainly, BRP's recent results and its new dividend are encouraging signs, but if you're going to take this recreational vehicle maker's stock for a spin, you need to be mindful of the risks.