This Canadian Dividend Stock Is Down 25% and a Screaming Buy

When a Canadian dividend stock drops sharply after earnings, it’s easy to assume something is wrong with the business.

However, not every sell-off signals long-term problems. In many cases, these rapid sell-offs are the result of short-term pressure that causes investors to overreact.

In fact, that appears to be exactly what’s happening with Stella-Jones (TSX:SJ) stock today. The share price has fallen from roughly $100 earlier this year to around $75 today, a decline of about 25%, after its latest quarterly results disappointed investors.

And while a 25% drop in the value of a company right after earnings can certainly look concerning at first glance, the more important question is whether the underlying business has actually weakened.

Why Stella-Jones stock sold off

In its most recent quarter, Stella-Jones reported net income of $60 million, or $1.10 per share, down from $1.67 per share a year earlier. So, considering that any time earnings fall year over year, it’s viewed as negative, a significant 34% fall in earnings will certainly cause the stock to sell off.

However, while the headline was the earnings miss and over the long haul, earnings consistency matters, there are clear signs this is a temporary impact and not a long-term issue.

Notably, while earnings fell by a third, revenue actually increased, rising from $773 million to $791 million year over year.

So, the issue wasn’t demand; instead, the pressure came from profitability. The Canadian dividend stock saw its gross margin fall from 21.7% to 19.6%, largely due to a shift in product mix, with more sales coming from lower-margin utility products. On top of that, pricing pressure and higher input costs also weighed on results.

So, while its quarterly profits declined, the business itself is still growing and generating more revenue, suggesting the weakness is temporary rather than structural.

And that’s often where opportunities to buy high-quality Canadian dividend stocks come from.

Because when the market focuses too heavily on near-term earnings pressure, it can overlook the fact that the underlying business hasn’t actually changed all that much, creating a significant opportunity for savvy long-term investors.

Why the Canadian dividend stock still looks like a solid long-term investment

Despite the short-term impact on its quarterly earnings, Stella-Jones is still a compelling high-quality company that operates in a niche that remains essential to the economy, even if it doesn’t always get much attention.

Because the company supplies utility poles and railway ties, products that need to be maintained and replaced on a regular basis regardless of economic conditions, it creates steady demand that doesn’t rely on strong economic growth to hold up.

That’s what makes the Canadian dividend stock so resilient. And while it retains most of its capital to continue investing in expanding the business, and therefore yields just 1.8% today,

Because of its consistent growth and reliability, the company has increased its payout annually for more than two decades.

More importantly, the payout ratio remains very low at roughly 20% to 25%. That provides a significant margin of safety and gives the company plenty of flexibility to continue growing the dividend over time.

So even during periods of weaker earnings, the dividend remains well supported, which is why Stella-Jones is such a high-quality stock that you can buy now and have confidence holding for years.

That combination of steady demand, improving revenue, and a highly conservative payout is what long-term investors should be focusing on, not only the short-term drop in earnings.

So, although the recent sell-off may look concerning at first glance, it could actually be giving long-term investors an opportunity to buy one of the top Canadian dividend stocks at a more attractive valuation.

The post This Canadian Dividend Stock Is Down 25% and a Screaming Buy appeared first on The Motley Fool Canada.

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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool recommends Stella-Jones. The Motley Fool has a disclosure policy.