As longtime readers know, I generally focus on the dividend-capture trade, but I occasionally stumble upon a high-yielding gem that is worth holding for the income and appreciation. The latest such name to pop onto my radar screen is Just Energy (JE), a Canadian independent energy marketer that sells gas and electricity to deregulated markets in the U.S. and Canada. Despite (or because of?) solid growth, Just Energy pays out a substantial portion of its earnings before interest, taxes, depreciation and amortization on a monthly basis, and it currently yields more than 11%. This yield is above my normal target yield for the dividend rotation strategy, so I do not mind just holding it and collecting the checks.
Just Energy was formed in 1997 to sell gas to the deregulated market in Ontario, and went public in 2001 on the Toronto exchange. From that time, the company has grown -- both organically and through acquisition -- from 217,000 customers in one province to nearly 4 million customers in Canada and 14 U.S. states. The company has grown "adjusted EBITDA" to $283 million last year from $116 million in 2006, an impressive and steady rate of growth. JE now has market capitalizaiton of $1.5 billion and enterprise value of $2.3 billion.
In its most recent quarter, the company reported sales of $646 million and adjusted EBITDA of $42 million. Gas revenue has been falling recently due to both warmer-than-usual winter weather and lower natural gas prices. Offsetting that has been rapid growth in electricity sales, which were up 25% in the June quarter due to an acquisition and organic customer additions. The company also generates revenue and gross margin from the sales of energy from renewable sources, carbon credits, ethanol and the rental of high efficiency water heaters and HVAC. The street is looking for JE to do $3.2 billion in revenue and $288 million in adjusted EBITDA.
Just Energy uses a measure it calls "embedded gross margin" in order to measure the growth in its profit visibility. This measure is akin to deferred revenue, in that represents future amounts that are locked in contractually. JE locks in an energy purchase then markets the gas or electricity at a target margin that will roll in over the five-year life of a contract. JE grew embedded gross margin to more than $2 billion in the quarter, representing 20% year-over-year growth.
The company attempts to hold the payout steady over the course of the year, meaning the dividend exceeds the cash flow in the seasonally slower summer months, but far exceeds cash flow in the strong winter months. In addition, the company has a share-buyback authorization outstanding.
Just Energy has grown an impressive business with steady revenue and earnings -- but, naturally, no business is without risk. JE must purchase energy before marketing it, so there is risk that a sharp move in commodity prices could pressure margins before a buy is fully resold. Low gas prices are also a negative to the company, even as they are a positive to consumers. Lower prices mean lower revenue on the same level of consumption, and a falling price can increase the attrition as customers jump between energy providers for the most recent best price.
Despite the risks, management has a strong track record of execution over the last decade and a half. With reasonable underlying growth and new initiatives in the green-energy sales, among others, the company should be able to sustain its attractive dividend while it grows the business even further.