Dividend Stock Analysis – CPA

[UPDATE 10/13/2014: A formalized version of my article was accepted for publication on SeekingAlpha! You can view it here!]

Welcome to a new stock analysis from DividendDeveloper! My goal in analyzing stocks on this blog is twofold. First, I want to check if a given stock meets my criteria for investing, and if it would make a good investment. Second, I want to expose my readers to companies that they may not have encountered before, whether because the company’s dividend yield is too low, their streak of increasing dividends is not long enough, or it just somehow slipped through the cracks of their screeners.

The company that I will be looking at today is Compañía Panameña de Aviación, S.A., better known as Copa Holdings, S.A. (NYSE:CPA).

Quick Background:

Quoting from CPA’s investor relations website:

Copa Holdings is a leading Latin American provider of airline passenger and cargo service through our two principal operating subsidiaries, Copa Airlines and Copa Airlines Colombia. Copa Airlines operates from its strategically located position in the Republic of Panama, and Copa Airlines Colombia provides service primarily within Colombia complemented by international flights from various cities in Colombia to Panama City, Caracas, Cancun, Mexico City, Guayaquil, and Quito.

Copa Airlines offers more than 280 daily to North, Central and South America and the Caribbean from its Panama City hub. Copa Airlines provides passengers with access to flights to more than 120 other destinations through codeshare arrangements with the new United pursuant to which each airline places its name and flight designation code on the other’s flights. Through its Panama City hub, Copa Airlines is able to consolidate passenger traffic from multiple points to serve each destination effectively.

Copa Airlines Colombia provides service to 10 cities in Colombia as well as international connectivity with Copa Airlines’ Hub of the Americas through flights from Barranquilla, Bogota, Bucaramanga, Cali, Cartagena, Medellin and Pereira. Additionally, Copa Airlines Colombia has international flights from Colombia to Panama City, Caracas, Cancun, Mexico City, Guayaquil, and Quito.

The company was founded as the national airline of Panama in 1944. Operations began in 1947, with the assistance of Pan Am. The company went public in December 2005. CPA operates a modern fleet of 92 passenger aircraft: 18 Boeing 737-700s, 48 Boeing 737-800s, and 26 Embraer 190ARs. The fleet is modern; each plane is 4.3 years old on average. The company has exclusively flown internationally since 1979, in order to better focus on competing with Air Panamá Internacional, the other major Panamanian airline. Major competitors to CPA include Delta Air Lines (DAL), United Continental Holdings (UAL) (which actually owns 10% of CPA), and Southwest Airlines (LUV).

For more basic information, check out the company’s website and the above links.

Fun fact: An investment of $10,000 in December 2005 would be worth $45,551.76 today, all dividends reinvested. (Source: FAST Graphs)

Investment Criteria:

So now that we have a basic understanding of who CPA is and what it does, let’s run our basic screening criteria on it, with the help of David Fish’s US Dividend Champions List:

• Pays a dividend: Yes
• Has 5 years of dividend increases: Yes (5 years)
• Has not frozen dividend for over 8 quarters: Yes
• Has a Chowder number of 12 or more: Yes (62.2)
• Has am EPS payout ratio of less than 70%: Yes (33.5%)
• Pays a dividend monthly or quarterly: Yes (Quarterly; February, May, August, November)

6 for 6, awesome! How will CPA do in round two with FAST Graphs? Let’s see:

• Has an S&P Quality Ranking of ‘A-‘ or better: Unknown (Not Rated)
• Has generally increasing earnings over the past 10 years: Yes
• Is fairly valued/undervalued according to the Normal P/E ratio (blue line): Yes
• Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): Yes

Other Bonus Ratings:

• S&P Capital IQ: 4-star buy
  • Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
• Thompson Reuters StockReport: 6 (optimized score of 4)
  • Scale is 1-10, 10 being best, 1 being worst
  • Optimized scores weight insider trading and price momentum heavier than other criteria
• Value Line: 3 for safety, 2 for timeliness
  • Scale is 1-5, 1 being best, 5 being worst

Thoughts:

The dividend yield is great at 3.61%, with an annual payout of $3.84. Although CPA is Panamanian, dividends are in USD. The company started paying dividends in 2006. Dividends used to be paid annually in May, but that changed in August 2013. The dividend was kept at 2008’s level in 2009, but dividend increases resumed in 2010 (for a total of 8 quarters, which, according to my criteria exemption, is allowable). The 5 year dividend growth rate is 58.6%, the 3 year is 50.4%, and the 1 year is 76.6%. The company’s dividends are subject to a 10% withholding tax.

The P/E ratio currently appears low at 9.3. Morningstar has a 1-year forward P/E ratio of 10.6. This may have more to do with the recent price collapse than with the quality of the company; the stock has a 5 year average P/E ratio of 13.92, according to YCharts. The company’s share price has suffered because of issues with Venezuela; the Venezuelan government is refusing to repatriate half a billion dollars that CPA has in the country.

Gross margins are at 70.62% while the net profit margin is 18.42%, both solid numbers (Source: Scottrade). Interestingly, gross margins are double the peer group’s average of 39.15%, but the profit margin is only slightly higher than the average 13.19%. The company performs much better on operating margins and pretax margins, tripling the peer group for each. The PEG ratio is very good at only 0.46. The price/book ratio is 2.28, and the price/sales ratio is 1.72. Debt is at acceptable levels, as their debt-to-equity ratio is 0.50. With operating income of $517.5 million and interest expense at $30.18 million, debt obligations are not an issue.

For the next five years, it’s projected that earnings for CPA will grow 12.5%, and the estimated total return is 19.5%, which is actually a little low for its peer group. For comparison, DAL’s five year ETR is 21.8%, UAL’s is 60.4%, and LUV’s is 47.2%.

CPA isn’t written about very often on SeekingAlpha, and the few articles are mostly Pro. However, one recent article can be found here (bullish).

Final conclusion:

I believe CPA is an attractive investment. I’m actually impressed by what I see. it seems to be a very strong company, especially for an airline. I will say that since I don’t know its quality ranking and because its dividend history is not the best, I’m slightly cautious. However, this would never be a core holding. Further, the Venezuelan issues seem to be priced in by now, providing a good entry point for new purchases. Since some people like price points, here’s what I would do (rough estimates based on FAST Graphs):

• Buy a full position at: $150.00 or below
• Add to/accumulate between: $150.00 and $160.00
• Hold only at: $160.00 or above

What do you think? Does CPA make the cut for your portfolio? Also, how can I improve future analyses?

Disclosure: None.

All data is accurate as of market close, 10/09/2014. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Image source is available here. Data source is FAST Graphs or company materials, unless otherwise indicated.

Tags: Copa Holdings S.A., cpa, dividend-stock-analysis