Wednesday, December 4, 2019

Tanger Factory Outlet Centers - Learn from my Mistakes

One of the more useful aspects of keeping my Transaction Journal is that when an investment goes south, I can go back and see what my reasons were for initiating or adding to a position. With Tanger Factory Outlet Centers ("Tanger") down 29% this year, it seemed like an opportune time to determine where my decision making could be improved before investing in another company in which I have lost about 40% of my initial investment.

Although I don't have a Transaction Journal entry for my initial establishment of a half position in Tanger on March 10, 2017, it was at $31.00 per share. That meant the starting yield was 4.2%, before management boosted the dividend by 5.4% in April 2017. I remember being interested in Tanger based on my past experience covering US-retailers at work, and having visited a number of Tanger outlet malls. The locations I visited were always busy, fully occupied by interesting stores, leaving positive impressions. The company had also partnered with RioCan REIT to open a location in Ottawa in 2016. My calculations based on some old FFO numbers suggests I initiated a position at a P/FFO of about 13X.

Based on the above, I can see a couple of risks that are common across other of my investments. Firstly, the 4.2% yield with an imminent dividend hike a month later would have been tempting. Add to this that I had a very limited, albeit positive view of the company based on my personal experiences. The kicker was likely the relatively cheap valuation, as I've always been reluctant to pay more than 15X earnings/FFO for companies/REITs.

Next is my entry from June 2017:

June 21, 2017
Buy - Added to half position of Tanger Factory Outlet Centers (NYSE: SKT) at $24.98
Reasons: With the valuation sitting around P/FFO of 10X, I think this discount mall REIT is one the biggest bargains I see in the US markets. The 5.5% yield, proven management team, and history of distribution growth throughout different points in the economic cycle all led me to add to this position.
Risks: Even though Tanger was down 3% when I bought for no reason, I do think it will go lower with any bad news/results in coming months. Chose to add now given my plans to discontinue paying the $30/quarter to my discount broker to give me a better CAD/USD exchange rate. Lastly, although I think the "death of the mall" rhetoric is overdone, I don't expect strong growth out of Tanger in 2017 given secular headwinds.

At the risk of sounding very self-critical, there are a couple of huge red flags. The fact I'm investing so that I can take advantage of a decent exchange rate to get the most out of a $30 fee; it's sad I'm stressing over sunk costs when I should be worried about capital preservation. Secondly, I seem to avoid asking myself why the company's stock is down almost 20% from my first purchase, and instead celebrating the cheaper valuation. It's odd that I expect the stock will fall lower, and growth won't happen in 2017, yet throw more money into the investment. On the plus side, at least I rightly identified those two risks.

Now for my last entry from October 2017.

October 27, 2017
Buy - Completed my position in Tanger Factory Outlet Centers (NYSE: SKT) at $23.00
Reasons: JC Penney cut their outlook for 2017 and I was able to purchase shares in Tanger at a ~5% discount to yesterday's price (which was a good deal at about P/FFO of 10X) in order to complete my position. Dual kickers: JC Penney isn't even a tenant of Tanger and by buying today, I will benefit from owning before the shares trade ex-dividend on Monday.
Risks: My bet is that Tanger will continue to trend downward in the short-term, and I'll likely miss out on buying at the bottom. That said, I can't time the market, and I view Tanger as a long-term holding. The way mall stocks are trading lately, the death of bricks-and-mortar retail seems to be imminent, even though online retail only accounts for about 10% of total US retail sales.

Buying before a company's stock goes ex-dividend continues to be a problem for me. This is clearly an issue of chasing pennies at the expense of losing dollars. Again, I foresee the stock falling lower, but am not prepared to wait for that to happen. My bet is that I had excess funds kicking around my RRSP that I wanted to invest before the end of 2017 in order to help meet my forward dividend income goal. Lastly, I throw in the 10% fact to justify my need to increase a falling position and annoy present me in the process.

Taking a step back, based on my entries, there are a couple lessons I can learn from my experience with Tanger.
- Investing in a company with a cheap valuation, without a thesis for what could happen in the future to raise the valuation, isn't a good idea. Cheap companies are sometimes cheap for a reason. My recent experience of paying a little more for great companies (i.e. Algonquin Power) shows I am capable of change.
- Buying shares prior to an ex-dividend date has no net benefit. I have to give up on chasing those pennies in order to save dollars.
- I have to work on my desire to keep myself heavily invested, with low cash amounts in all three of my investment accounts. It's sometimes alright to let cash sit idle for periods of time.
- Before adding to positions that are going down, I should revisit my initial investment thesis instead of simply justifying my actions as "averaging down". There should be valid reasons for continuing to invest in a company, not simply to complete positions.
- I have to stop generalizing my personal experiences and comfort level with a brand. I'm one of millions of Tanger customers, and my experiences are totally irrelevant to their success as a company.

Here's hoping you might be able to learn from my mistakes and avoid them yourself.

Monday, November 25, 2019

Is Enbridge's Dividend Sustainable?

Is Enbridge’s dividend sustainable? When @johnyboy1853 asked me that on Twitter at the end of September, I thought it was an excellent question. Afterall, the company’s dividend payout ratio of EPS was 108% in 2017, 133% in 2018, and 101% over the last four quarters ending September 30, 2019. Given Enbridge produces more dividend income for me than any other investment holding, a deeper dive was merited.

As scary as the payout ratios listed above look, I wanted to focus more on cashflows. Looking at the 2018 cashflow statement, the CFO of $10.5B and asset sales of $4.4B easily cover the $6.8B of CAPEX and $3.8B of dividends (common and preferred). However, over the last four quarters, the CFO of $9.9B and $2.5B of asset sales barely outpaced the $6.2B of CAPEX and $6.1B of dividends.

Although the past earnings and cashflows are important starting points to understand Enbridge’s dividend sustainability, investors should focus on the future to determine if Enbridge can keep affording to boost dividends by 10% in 2020. Looking at consensus estimates, analysts expect Enbridge to generate CFO of $10.8B in 2020, spend $5.5B on CAPEX, and pay out dividends of $6.7B. The $1.4B gap between outgoing cash and CFO would have to be made up via asset sales or debt issued. Enbridge had a target to sell $8B of non-core assets in 2019, so $1.4B of non-core assets would likely be very achievable for 2020.

Beyond the numbers, the sustainability of Enbridge’s dividend will ultimately be determined by the long-term success of their business model. With a large and diversified asset base, and pipelines throwing off predictable cashflows, there are reasons for optimism. Some key risks include the heavily regulated environment in which the company operates, reputation risks when spills occur, as well as Enbridge’s still highly leveraged capital structure (debt to EBITDA well over 5X at September 30, 2019).

Obviously my crystal ball is murky when it comes to Enbridge’s dividend sustainability. I did find it interesting that last December during their investor day, Enbridge’s management talked about growing their distributable cashflow by 5-7% after 2020. That seems like reasonable growth range given that TC Energy, a similar company, recently gave their long-term dividend growth range of 5-7% after 2021 during their investor day presentation. 

Do any of you feel like Enbridge won't be able to sustain their dividend for the next five years?

Wednesday, June 5, 2019

Three Self Storage REITs with Rising Dividends

Back in October 2016, I initiated a position in Life Storage Inc. ("LSI"), a US-based self-storage REIT that had a history of dividend growth dating back to 2012. I completed my position in December 2016 and my cost base was about $85/share. The company increased its dividend by 5.2% in April 2017, and has not raised its payout since.

For context, LSI managed to raise its revenue and funds from operations ("FFO") by 4% and 11% respectively in 2018. Both of those figures were up again through the first quarter of 2019. Having went through various investor presentations, earnings call transcripts and quarterly reports, I can't find any reason why the dividend growth came to a halt. Based on my frustration with the stagnant dividend and the fact the company is trading near a 52-week high, I've been thinking about replacing it with another self-storage REIT.

I created the table below to compare the five largest (by market capitalization) US self-storage REITs.



Based on the 1-year dividend growth (last column), CubeSmart ("CUBE"), Extra Storage Space ("EXR") and National Storage Affiliates ("NSA") became the obvious candidates to replace LSI in my portfolio. Although NSA is the cheapest priced with a Price/FFO ratio of 13.5X and has the highest dividend yield of 4.3%, it's also by far the smallest and most geographically concentrated REIT. I'm more attracted to CUBE and EXR given their large size and geographical diversity of locations.

These types of replace or hold decisions tend to baffle me and cause a great deal of over-analysis. That said, selling and replacing LSI has been one of the potential transactions at the forefront of my mind for a while now, and I promise to keep you updated on any decisions I make via my Transactions Journal.

Are you considering selling and replacing any of your holdings? Have you been successful of these types of replacement transactions in the past?

Friday, May 24, 2019

The 2 Vanguard ETF Experiment Continues - Year 4

In May 2016, I started my ETF experiment buying Vanguard FTSE Canada All Cap Index ETF ("VCN") and Vanguard FTSE All-World Ex Canada Index ETF ("VXC") for my son's Registered Education Savings Plan ("RESP"). Since that time, I added my daughter to the RESP, and have continued buying shares in VCN and VXC each year. After four years, it seems like a good time to check-in to see how this experiment has progressed.

I've stuck with the two ETF strategy for four years since it's fast, low cost, low maintenance and the ETFs produce returns in-line with the respective indices. Expanding a bit further, the time commitment to implement the strategy is about 5-10 minutes a year. After making my RESP contribution and waiting for the government of Canada to match 20% of it a couple months later, I simply calculate how much of the two ETFs I need to buy to maintain an equal dollar weighting. The low cost refers to the $20 per year I'm charged for buying shares in VCN and VXC. Unlike my other investment holdings which I monitor via news articles and filings, I don't monitor either ETF actively. When I'm conducting the performance analysis of my portfolio at year end, I usually spend a couple seconds seeing how closely each of the ETFs tracked their respective indices (answer: very). Then there's nothing to do until after the Government of Canada matches my contribution in the next year.

As smoothly as the ETF experiment has been going, I'll admit to making a stupid mistake for the second straight year. I bought shares in VCN and VXC earlier this month before the Government of Quebec added their Quebec Education Savings Incentive ("QESI") in the RESP. I keep forgetting that the QESI exists and to wait for it to be deposited before buying shares of the ETF. Now I'm stuck trying to figure if it makes sense to add a small number of shares to one of the ETFs by overweighting a position, or just wait until 2020. 

Despite the dumb mistake, I continue to enjoy the ETF experiment and have every intention to continue it until my kids head off to college, university, or a trade school. If anything, I have considered taking a two ETF approach to my personal investing. The simplicity makes the strategy very tempting. For those of you who are interested, my Investment Holdings to show the updated positions in VCN and VXC after the buy earlier this month. 

Wednesday, April 3, 2019

Dividend Paying Companies That You Hate

Tuesday February 5th, we had our alarm clock set for 5:30 so that we could get the kids ready and bring them to the airport by 9:00 for a week vacation in Mexico. At 4:10, my son woke us up crying since he'd vomited. We quickly changed his bedding, put him in a different pair of pjs, and told him he'd fell better if he got some sleep. My shower was then interrupted by my son making a mad dash to throw up over the toilet. Again, we cleaned him up, gave him hugs and told him to take it easy. We hit the road a bit late, but five minutes from our house, my son was sick again, and we came to the realization that five hours on a plane with a sick four year-old wasn't a smart plan. We turned around, brought my daughter to daycare, my son threw up again, and by the time we got home, my wife and I were both feeling pretty awful.

Since we had checked into our Air Transat flight the night before, we thought we should give them a call and tell them we wouldn't be showing up. The agent on phone didn't seem to care that we weren't showing up and told my wife she should call back in three days to talk about a partial refund. Having dealt with airlines semi-frequently over the past 10+ years at my current job, I told my wife not to expect anything. Despite low expectations, Air Transat actually managed to disappoint her during the initial call to the point where she told them she needed a break. The agent tried to justify how the airline still had to charge us for pre-paid baggage fees, despite never hauling our luggage. When my wife asked if they managed to resell our seats, the agent evaded her. After "a supervisor" called back my wife later that day, providing a refund of about ~20% of our ticket costs, my wife promptly informed me that we would never fly Air Transat again. For context, after a similar experience a couple years ago with Videotron (a cable/telephone/Internet provider in Quebec), my wife canceled our cable and Internet subscription within days, and laughs every time she tares up a junkmail flyer from Videotron.

 The Air Transat episode got me thinking about a near-investment I made in WestJet (TSX: WJA). Their stock was priced reasonably (P/E around 15X if memory serves), yielding close to 3% at the time, they seemed to be growing their dividend regularly, and I thought investing in an airline would provide me with some industry diversification. While considering investing, I flew to Victoria on WestJet, had a horrible experience, and took the airline off my watchlist after checking into my hotel. I've a couple articles similar to this one indicating that investing in companies you hate can produce good returns. Although my gut reaction is that companies you hate probably aren't interested in long-term sustainable growth fueled by satisfied customers, after considering my own experience investing in dividend paying companies I hate, I'm not sure what to conclude. A couple examples of dividend payers that I hate, yet own, jump out in my mind.

The Bank of Nova Scotia (TSX: BNS):
If you follow me on Twitter, I apologize if you've noticed one of my many sarcastic, mean-spirited tweets calling out Scotia iTrade (my discount brokerage). Ever since BNS took over iTrade from E-trade, the client-focus and responsiveness fell off a cliff. For instance, iTrade still charges the same $10/trade as E-trade promoted when I joined in 2001. Scotia programmed a US-dollar RRSP, and then sat on it for four years before introducing it late last year. Why introduce a service your clients ask for when you can instead charge them $30/quarter for a fair USD/CAD exchange rate? I think iTrade is the only brokerage in Canada that holds dividends for an extra day (minimum) before depositing them into your account. Then there's the unpopular changes BNS has made transitioning ING bank's former Canada business into their "Tangerine" brand.

In terms of investment performance, BNS is up about 10% over the past five years (not including dividends). Safe to say that their operating performance and integration of acquired subsidiaries has caused a lag in their stock performance. Despite the bank being attractively priced ~10.5X trailing earnings and yielding 5%, I wouldn't consider adding to my position in BNS in the near-term.

BCE Inc. (TSE: BCE):
Like thousands of other Canadians, I have a couple stories about Bell Canada's horrific customer service. Before moving out of my condo, I called Bell to disconnect my little-used landline.. I was told that since I was moving on a Saturday, my line couldn't be disconnected officially, in their system until Monday at 9:00am, and I'd be responsible for any long-distance charges incurred over the 48 hours the new owner was in the condo. While holding back my laughter, I asked the Bell representative how they planned to bill me for charges after I had left, knowing I had prepaid my last bill and left them with no forwarding address. The agent seemed confident when she warned me that they would find me. That seemed like an appropriate end to my relationship with Bell Canada during which I threatened to take them to small claims court when they informed me they would be keeping a $20 prepayment I made against a Virgin mobile cell phone. Perhaps realizing that the cost/benefit relationship wasn't in their favor, the agent agreed to transfer back the $20 to me.

BCE is up over 20% over the past five years (not including dividends). The stock is a bit pricey at 19X trailing earnings, but I might consider adding to my position if it becomes a better value. Maybe it's the personal lack of recent bad interactions with Bell that has me feeling that way?

There are other dividend paying companies in my portfolio with which I have had less than spectacular interactions with over the years:

Enercare (now part of Brookfield Infrastructure (TSX: BIP.UN)) / Enbridge (TSX: ENB):
Since moving to Quebec seven years ago, I've rented my hot water tank from Enercare, with the payment flowing through Enbridge, my natural gas provider. I called Enbridge last year to see how much it would cost me to buy the 2009 hot water heater and they quoted me a price equal to that of a brand new, energy efficient heater. I've since been trying to figure out how to buy and get a natural gas heater installed so I can tell Enercare/Enbridge where they can pick up and stick their 10-year old heater.

Rogers Communcation (TSX: RCI.B):
During my condo living years, twice I was quoted better prices for Rogers packages that were not honored on my next bill. This was apparently a favorite sales tactic for the company, which they continue to do over the telephone and in their retail stores.

Canadian Imperial Bank o Commerce (TSX: CM):
CIBC eliminated my no-monthly fee plan, didn't inform me of the change, started to charge me $10 per month on an account with no activity, then decided not to reimburse me when I called them out on it. Of course, this resulted in my closing my account, changing my credit card from one issued by them, and never setting foot in a CIBC branch again.

Canadian Apartment REIT (TSX: CAR.UN):
I moved from a CAR apartment to my condo over a period of a month during which I still paid rent. When I went for my last boxes about a week before month end, I noticed my fridge had been emptied including a recently acquired bottle of Cuban rum. This pissed me off to the point where I kept a key to the building that I used to park underground and play squash for years after I moved out.

McDonalds Corporation (NYSE: MCD):
Having worked in fast foot for about five years during high school, I have conflicted feelings about McDs. I know not to expect too much from minimum wage earning high school kids, but I feel that if the workers got my orders right more than half the time, I'd feel less crappy about owning shares in the company. In contrast I've never had a bad experience during visits to A&W or the Keg (other holdings of mine).

Is it good to hold shares in dividend paying companies that you hate? Looking at the track record of some of the companies above, the investment performance results are mixed. It almost seems like a necessary evil in Canada to hold shares in a bank, telecommunications firm and utility provider if you're a diversified dividend growth investor.

Do you own any dividend paying companies that you hate doing business with? If so, how have they performed for you?