The first purpose of investing within the fairness markets is to generate inflation-beating returns over time. To realize this purpose, it’s important to constantly establish high quality firms positioned to develop income and earnings at a gradual tempo.
On this article, I’ve recognized one such Canadian inventory that’s flying below the radar in 2025. Valued at a market cap of $762 million, Doman Constructing Supplies (TSX:DBM) is engaged within the wholesale distribution of constructing supplies and residential renovation merchandise in the US and Canada. It sells merchandise to small unbiased lumber yards, regional constructing materials sellers, dwelling enchancment chains, and retailers. The corporate serves its merchandise to new dwelling building, dwelling renovation, and industrial markets.
Within the final 10 years, the TSX inventory has returned near 290% to shareholders, after accounting for dividend reinvestments. Right here’s why it stays a high funding proper now.
Is that this TSX inventory nonetheless a great purchase?
Doman Constructing Supplies reported file quarterly revenues of $886.7 million within the second quarter (Q2), regardless of navigating headwinds corresponding to tariffs and elevated mortgage charges.
The constructing supplies distributor achieved gross margins of 16.1%, producing $142.7 million in gross revenue. Adjusted EBITDA (earnings earlier than curiosity, tax, depreciation, and amortization) stood at $80 million, and internet earnings got here in slightly below $28 million. The corporate paid its 61st consecutive quarterly dividend of $0.14 per share, demonstrating a dedication to shareholder returns.
The sturdy efficiency in Q2 displays contributions from the Doman Tucker Lumber acquisition accomplished in October 2024, which wasn’t included in prior yr comparisons. Administration emphasised disciplined stock administration and value management as key drivers of margin efficiency amid unstable lumber pricing throughout totally different species and geographies.
Western species remained weak all through the quarter, whereas Southern Yellow Pine pricing softened within the again half. Nonetheless, volumes held comparatively regular, declining only some share factors yr over yr.
Importantly, administration maintains an acquisitive stance, stating they received’t enable leverage targets to stop executing on compelling acquisition alternatives. The corporate sees not less than 5 extra years of consolidation runway within the pressure-treated lumber area, with potential targets starting from single areas to multi-site operators.
Doman is implementing freight optimization know-how acquired by way of a 2024 deal throughout its U.S. operations whereas transitioning from company-owned fleets to third-party carriers in choose areas.
Administration expects to profit from significant reductions in prices, insurance coverage, and legal responsibility publicity following its optimization efforts. Doman can also be changing its Gilmer, Texas, sawmill this fall to automate fence manufacturing, with plans to increase upgrades throughout all sawmills. This positions Doman to seize substantial demand if tariffs on Brazilian imports maintain, creating provide shortages in U.S. fencing markets.
Is the Canadian dividend inventory undervalued?
Canada confirmed encouraging late-quarter momentum after a sluggish begin, with restoration accelerating in July and August throughout lumber, plywood, and specialty merchandise.
Administration expects a stronger second-half efficiency might assist recuperate floor misplaced within the first six months because the late winter lastly subsided and commerce uncertainty partially stabilized.
Stability sheet optimization stays a high precedence with administration concentrating on leverage of lower than 4 occasions inside 18 months by way of free money stream technology.
Analysts monitoring the TSX inventory forecast free money stream to enhance from $93 million in 2024 to $142 million in 2027. Given an annual dividend expense of roughly $49 million, the payout ratio for the dividend inventory ought to fall from nearly 50% in 2024 to 34.5% in 2027.
If the TSX inventory is priced at 10 occasions ahead FCF, it ought to greater than double inside the subsequent 18 months. If we alter for dividends, cumulative returns might be nearer to 110%.
