Buying Aecon Group Paved the Way to an 80% Return

Last summer, in 2023, the engineering and construction company Aecon Group reported dreadful quarterly earnings. The company’s earnings report was so bad that the stock tumbled 16% the following day.

The poor results were largely due to four construction contracts that were losing money with no end in sight. Specifically, the work was related to the Coastal GasLink in British Columbia; the Eglinton light rail transit (LRT) and Finch LRT in Toronto; and the Gordie Howe Bridge in Windsor and Detroit. To make matters worse, these contracts were all signed with a “fixed price”, meaning that Aecon’s payment was determined before any work even started. This differs from a “cost-plus” deal, which would have given the company additional cash if there were any cost overruns.

As you might have guessed, the cost overruns surpassed anyone’s wildest dreams.

Though it was clear that the next several quarters would bring unpredictable results, we knew that the Coastal GasLink, Eglinton LRT, Finch LRT, and Gordie Howe Bridge would eventually complete. Furthermore, the dividend at the time was 7%, which meant that if the stock price never moved a single penny, our clients would double their money, simply on the income within about 10 years.

We purchased the stock the next day at $10.55 per share for client accounts that met our criteria. Since then, our clients have collected $0.75 per share in dividends. Today, it trades at $18.50 per share. We still own the stock and don’t plan to sell it any time soon.

Today, one year after our purchase, those four contracts – now only three because the Coastal GasLink project is complete – are expected to soon come off the books. Once that happens, which we expect to be some time in 2025, the company’s profit margins will be more predictable for the analysts who downgraded the stock last summer; the earnings results will accompany less uncertainty; and the valuation multiple that investors are willing to pay to own the stock will expand.

The need for infrastructure investment is evident.

Aecon has a $6.2 billion backlog of projects in its pipeline. To put that into perspective, we expect the company to earn $4.1 billion in total revenue this year. Even more exciting, there are five projects in the development phase – rail and subway expansions, a nuclear project, and two airports – that will double today’s backlog if the plans proceed forward.

Right now, the three legacy contracts represent only $269 million of the $6.2 billion backlog, which is about 4% of the total figure. That’s down from $330 million in March 2024 and $420 million in December 2023.

Unfortunately, the dividend yield has decreased from 7%. This occurs because companies like Aecon pay a fixed dollar amount in dividends, and as the stock price increases, the yield decreases. In Aecon’s case, the dividend payment is presently $0.19 per share every three months. Because the stock has climbed significantly higher over the last year, the yield is now only 4.1% ($0.19*4 times per year / $18.50 = 4.1%).

Last month, the company announced that it was authorized to repurchase 5% of its outstanding shares. Because the company is debt-free, once the LRT contracts are complete, we expect management to reevaluate its capital allocation program and increase its dividend to reward patient shareholders.