Brookfield Corp (TSX:BN) is one of Canada’s most popular and most controversial dividend stocks. On the one hand, CEO Bruce Flatt has been credited with helping the stock rise 14.1% annually since he took over. On the other hand, the company has complex accounting practices, which have led some to find questionable.
Personally, I am a Brookfield shareholder. I acquired a small position in the stock a few months ago because it was being beaten down. Since then, I have pretty much stayed put, neither adding to the position nor selling shares. I’ll probably keep it that way in the coming months. In the paragraphs below, I’ll explain why I feel that way, focusing on three different points: one that favours buying, another that favours selling, and one that favours holding.
The case for buying
The case for buying Brookfield comes down to three key points:
- Management reputation
- Quality of assets
- Valuation
First off, Brookfield’s management has a great reputation. Especially its CEO Bruce Flatt. Since he took over Brookfield, the company’s stock has compounded at 14.1% per year. Even though he’s Canadian, he has been called “one of America’s top investors.” His reputation is so good that Brookfield was the only company that legendary investor Howard Marks would even consider selling his firm to (he did in fact sell 67% of it to Brookfield). Flatt has always said that Brookfield’s reputation lets it get in on deals that other companies can’t access. The deal with Howard Marks would seem to confirm that.
In addition to a great leader, Brookfield also has high quality assets. Its real estate assets are all “trophy” properties with rich tenants. Its insurance business grew 245% last quarter. Brookfield Asset Management has a 50% net margin. These characteristics would seem to imply that Brookfield’s assets are of very good quality.
Finally, there’s the valuation. Despite having a fantastic CEO and high quality assets, Brookfield stock is fairly cheap. At today’s prices, it trades at just 0.5 times sales, 1.3 times book value, and 8 times operating cash flow. The P/E ratio is technically high, but that’s mainly due to non-cash factors impacting the stock price, such as “minority interests.” Should Brookfield’s investments pay off then those factors will not recur.
The case for selling
Despite all of the positive points in its favour, it’s possible to make a case for selling BN stock. There are two main points in favour of doing so:
- Brookfield is complex.
- Its interest expenses are rising.
The complexity point is easy enough to understand. Brookfield is a holding company, which means that its accounting practices are complex. This doesn’t mean that the company is playing accounting games – any similarly complex company will end up with confusing financial reports – but it does mean that to understand this company, you’re going to have to do a lot of homework.
Secondly, BN’s interest expenses are on the rise. Last quarter, interest expenses rose by $1.4 billion or 40%. The percentage increase was 40%. As long as it continues growing, Brookfield’s GAAP earnings will continue to fall.
The case for holding
The case for simply holding Brookfield stock is simple and encapsulated in the combination of factors listed above. Brookfield has a lot of things going for it, and also a few strikes against it. It’s a tough nut to crack, which is why you might want to keep holding what you have, without aggressively buying more. It’s not the simplest stock in the world, to put it mildly.
