Thursday, January 19, 2017

ATCO Ltd. - 24 Years of Dividend Growth

Of the top four companies with the longest annual streaks of dividend increases found on the Canadian Dividend All-Star list, three are in the utility industry. After reviewing both Canadian Utilities Limited and Fortis Inc this post will give an overview of ATCO Ltd. which has a 24-year dividend growth streak.

Company Overview

ATCO Ltd is a Calgary-based utility company with global operations falling into three segments: electricity (46% of YTD revenues at Q316 ), pipelines and liquids (36%), and structures & logistics (18%). ATCO holds controlling interests in Canadian Utilities Limited (52.9% ownership) and ATCO Structures & Logistics Ltd. (75.5% ownership).

Dividends

After announcing a 15% dividend increase on January 12, 2017, the company's dividend yield is currently ~2.9%. The earnings payout ratio is moderate at 55% of the trailing 12 months EPS.  The 3, 5, and 10 year dividend growth rates are very impressive at 15%, 15%, and 10.8% respectively.

Valuation

The current share price of $45 has lead to a trailing P/E of 22X. This value is relatively high given the stock has traded in the 12-14X range for most of the past 5 years. Looking at EV/EBITA leads to a similar conclusion, with the company currently trading at 8.1X in contrast with their 5-year average in the 7-8X range.

Qualitative Catalysts

There are some key reasons why you would consider adding ATCO to your investment portfolio

1. Dividend Growth & Coverage
- The recent 15% dividend increase from ATCO represents the sixth consecutive year that management raised the payout by 15%. With a relatively low payout ratio for a utility company of 55%, the dividend is well covered. Planned capital expenditures of $3.8B over the next two years should help ensure that the dividend continues to grow in the future.
2. Capital Investments Leading to Higher Cashflow Generation
- With a plan to invest $5.3B in regulated utility and contracted capital growth projects between 2016 and 2018, it bodes well to see that past capital investments have led to growing cashflow from operations over the most recent five years. Although past experience is not indicative of future results, it is encouraging to see that the company's growth aspirations are supported by past success.
3. Diversification Gained Through Holding Company Structure
- Compared to the two companies in which they hold controlling interests (Canadian Utilities Ltd. and ATCO Structures & Logistics Ltd.), ATCO provides further geographic and product diversification to a potential investor. The added diversification should lead to smoother cashflows over the long-term, which seems to be the case when comparing ATCO's financial results to those of Canadian Utilities Ltd.


Qualitative Drawbacks

Beyond the fact that the current valuation of the company's shares seems high from a historical perspective, there are some additional drawbacks for investors to consider before adding Canadian Utilities to their investment portfolio.

1. Financing Needed for CAPEX
- With ATCO's aggressive capital expenditure program over the next two years, the company will need to continue to access the debt and capital markets. This financing will result in higher leverage and shareholder dilution. Over the last five years, the company has issued approximately $4.5B of net additional debt in order help fund their CAPEX.
2. Regulatory Risk
- Being involved in regulated businesses entails the risk that future regulatory decisions outside of the company's control could materially impact ATCO's' operations and results. For instance, in October 2016, the Alberta government set the maximum return on equity rate that ATCO could earn on their regulated electricity assets in that province at 8.3% in 2016 raising slightly to 8.5% in 2017. ATCO's regulated assets in different geographical locations adhere to similar capped rates of return.
3. Complexity of Holding Company's Operations
- While reviewing financials for ATCO, I could not accurately determine the amount of their assets subject to regulations, nor could I determine the geographical diversification of their sales. Such is often the case for holding companies whose financial statements are more difficult to understand due to complex financial reporting requirements.

Conclusions

Of the three utility companies I have recently reviewed, I find ATCO the most compelling. Not only do they have a relatively low dividend payout ratio at 55%, their six straight years of dividend growth of 15% and their diversified operations are all strong factors in support of the company. The major downside I see currently is that their valuation is very high by historical standards. Any prolonged weakness in their share price could very well lead to a situation where ATCO would be an excellent long-term utility investment.


What would make you consider adding shares of ATCO Ltd. to your portfolio?

Thursday, January 12, 2017

Canadian Western Bank - 25 Years of Dividend Growth

When asked which Canadian bank has the longest record of annual dividend growth, few investors would answer Canadian Western Bank (“CWB”). However, the relatively small Edmonton based bank, CWB has an impressive 25 year dividend growth streak that is the third longest on the Canadian Dividend All-Star list.

Company Overview

CWB provides various personal and business banking services through its 42 branches located in Canada’s four western provinces. The bank specializes in mid-market commercial banking, real estate and construction financing, equipment financing and leasing, and energy lending. CWB was active making two acquisitions in the wealth management sector in 2016 along with acquiring the loan portfolio and related business assets of GE Capital’s Canadian franchise financing business.

Dividends

After announcing a 4.5% dividend increase in August 2016, the company's dividend yield is currently ~3.0%. The earnings payout ratio is moderate at 44% of the trailing 12-months EPS.  The 3, 5, and 10 year dividend growth rates are impressive at 8.4%, 10.5%, and 13.0% respectively.
% annual average growth planned through 2021
Valuation

CWB's share price was pretty consistent around $30 in recent months leading to a trailing P/E of 14X. This value is toward the higher end of the average P/E of 10-15X range for the past 5 years. Looking at Price/Book Value provides a different perspective with the company’s current 1.3X multiple being on the lower end of the average range of 1.1X to 2.0X over the past 5-years.  

Qualitative Catalysts

There are some obvious reasons why you would consider adding CWB to your investment portfolio.

1. The Dividend Streak Covering Multiple Business Cycles
- Despite a meltdown in oil prices that severely impacted their home province of Alberta in 2014, a global financial crisis in 2009, and multiple troughs in the business cycle, CWB has proven their resilience by raising their dividend for 25 straight years. Despite not having the size of Canada’s five big banks (~$25B of assets vs $501B of CIBC <- the smallest of the big five), CWB seems more committed to rewarding their long-term investors via regular dividend increases.
2. Effective Credit Management Policies
- The two biggest surprises to me while reviewing financial metrics for CWB were that only 1% of its total loans related to oil and gas production, and that non-performing loans were only 0.5% of total loans over the past 12-months.  These two metrics taken together show me that the bank has effective credit management policies that have led to a diversified loan portfolio. 
3. Growing Geographical Diversification
- With its roots in Western Canada, I assumed that the majority of company's loans would be related to Alberta. However, I underestimated the growing geographical diversification the company has successfully undertaken in recent years. Although Alberta represents 36% of total loans, British Columbia also accounts for 36%, while Saskatchewan at 6%, Manitoba at 3% and Ontario and other provinces at 19% further demonstrate CWB’s growing geographical footprint.

Qualitative Drawbacks

Although there are multiple reasons to consider investing in CWB, there are drawbacks to consider as well. 

1. Slowing Dividend Growth
- Although CWB’s management does not specifically issue guidance regarding dividend growth, historically the dividend is raised by a penny each year, meaning the dividend growth percentages will decrease if the penny trend continues. Also of note is that the bank targets  a 30% payout dividend payout ratio. The fact that the payout ratio has currently grown to 44% will limit management’s ability to further grow the dividend in the short-term.  
2. High Reliance on Alberta & British Columbia to Drive Earnings Growth
With 72% of CWB’s loans associated with Alberta and BC, the bank relies on these two provinces to fuel future earnings growth. The profitability of business and mortgage loans in Alberta are somewhat dependent on the energy sector’s rebound. Although BC’s economy is more robust than that of its eastern neighbor, the sustained strength in the province’s housing market would help CWB realize profitable and growing mortgage loans in BC.
3. Earnings Volatility Given Relative Small Size of Bank
One of the reasons why investors of all stripes are attracted to Canada’s big five banks is the stability of their earnings. Their massive operations, exposure to different countries, and conservative lending practices have led to relative stable earnings growth. In contrast, the smaller scope of operations and less geographically diversified lending of CWB have led to more earnings volatility that will likely continue in the future.  
  
Conclusions

Most Canadian dividend growth investors have at least one bank in their investment portfolio. Although Canadian Western Bank is an attractive candidate to add to a portfolio given their  25 year streak of raising their dividend and resilience throughout business and economic cycles, I would caution that there will likely be a better time to add the company to your holdings. In order to provide an adequate margin of safety to an investor due to slowing dividend growth and more volatile earnings than its peers, it is worth waiting for a better entry point (P/E ~ 10-12X) before acquiring shares. 


Would you consider adding shares of Canadian Western Bank to your portfolio?

Thursday, January 5, 2017

Fortis Inc - 43 Years of Dividend Growth

After reviewing Canadian Utilities, which tops the list of companies on the Canadian Dividend All-Star list with an impressive dividend growth streak of 45 years, the next logical company to look at is Fortis Inc with their 43 year record of raising their payout. Similar to last time, my focus will remain mostly on the qualitative factors that make Fortis an interesting investment, as opposed to the quantitative characteristics which are the focus of many other dividend bloggers.

Company Overview

Fortis characterizes itself as a regulated, low risk and diversified utility company. With approximately 92% of 2015 earnings derived from regulated utilities, the bulk of the company's generated cashflows are indeed low risk. Although Fortis is based in Eastern Canada, their electric and gas regulated and non-regulated operations have customers in five Canadian provinces, nine US states and three Caribbean countries (Turks and Cacos, the Cayman Islands, and Belize).

Dividends

After announcing a 6.7% dividend increase in September 2016, the company's dividend yield is currently ~3.9%. The earnings payout ratio is moderate at 58% of the trailing 12-months EPS.  The 3, 5, and 10 year dividend growth rates are impressive at 7.1%, 5.6%, and 8.6% respectively. Fortis's management has issued guidance that they plan to grow their dividend by an average of 6% per year through 2021.
% annual average growth planned through 2021
Valuation

Fortis's share price was pretty consistent around $40 during 2016 leading to a trailing P/E of 22X. This value is at the higher end of the average P/E of 18-22X range for the past 5 years. Looking at EV/EBITA leads to a similar conclusion, with the company currently trading at 13X in contrast with their 5-year average in the 11-13X range.

Qualitative Catalysts

There are some obvious reasons why you would consider adding Fortis Inc to your investment portfolio

1. Stable Cashflows from Regulated Businesses
- With 92% of Fortis's 2015 earnings coming from regulated businesses and the company reporting that 96% of their assets generate regulated cashflows at Q316, the stable nature of the majority of the company's cashflow is a selling point for investors seeking a low volatility investment.
2. The Dividend Streak and Guidance
- As a dividend investor, you should seek out companies with management who are not only committed to sharing their profits with you, but who realize the importance of raising their payouts over time in-line with business results. With the second longest annual streak of dividend increases of any Canadian company and plans to continue to grow the dividend through 2021 at an average rate of 6%, management clearly puts the interests of income investors at the forefront.
3. Growing Geographical Diversification
- With its roots in  Eastern Canada, I assumed that the majority of company's assets would be based in the maritime provinces. However, I underestimated the growing geographical diversification the company has successfully undertaken in recent years. Only 5% of the company's assets relate to Eastern Canada, with the bulk of assets situated in the US (62%), followed by British Columbia (17%), and Alberta (9%).

Qualitative Drawbacks

Beyond the fact that the current valuation of the company's shares seems on the high end, there are some additional drawbacks for investors to consider before adding Canadian Utilities to their investment portfolio.

1. Regulatory Risk
- With 90%+ of Fortis's earnings depending on regulated business, there is a material risk that future regulatory decisions outside of the company's control could materially impact the company's operations and results. The election of Donald Trump as US President might have increased regulatory risk given Fortis's operations in nine US states and Mr. Trump's protectionist rhetoric during his electoral campaign.
2. Multiple Risks Associated with the Company's Strategy of Growth by Acquisitions 
- Integration Risk: Fortis ($16B market cap) faces integration risk relating to its recent $11B acquisition of ITC Transmission. The degree to which Fortis can successfully integrate ITC into their organization in a timely manner will be key in helping management meet their dividend growth projections in a responsible manner.
- Risk of Overpaying: Given the bull market in North America is long in the tooth, if Fortis continues to look to grow via acquisitions, they face an increasing risk of overpaying for target companies. Investors can gain some confidence in Fortis's management's historic record of paying fair prices for the companies they acquired.
- Dilution Risk: Investors should be cognizant of the fact that as Fortis continues to grow via acquisitions, their investment in shares of the company will be more diluted. Fortis will issue new shares in order to maintain their targeted capital structure.

Conclusions

Most Canadian dividend growth investors have at least one utility in their investment portfolio. Although it might be tempting to include Fortis in your portfolio due to their 43 year streak of raising their dividend and the 6% dividend growth guidance through 2021, I would caution that there will likely be a better time to add the company to your holdings. Given the relatively high current valuation, integration risks associated with the large ITC acquisition, and high regulatory risk, there are better companies to buy at the moment. However, I think Fortis could be an attractive investment at a lower valuation once they integrate ITC into their operations.

Would you consider adding shares of  Fortis Inc. to your portfolio?



Monday, January 2, 2017

2016 - My Year in Numbers, Tables and Graphs

At the end of 2015, I completed my assessment of progress toward that year's goals with a post that was very focused on numbers. Since that entry was fun to write and because even I found my 2016 goals assessment depressing, here's a far-ranging review of 2016 with some numbers, tables and graphs! Sometimes the accountant in me really shines through :-)

Dividend Growth Metrics
17.1% increase in expected dividend income at YE16 vs YE15
32.1%, 8.7%, and 4.4% increases in expected dividend income in my unregistered account, TFSA, and RRSP at YE16 vs YE15
5.4% dollar-weighted average increase in dividends per holding in my portfolio during 2016
4.1%, 5.2%, and 7.6% dollar-weighted average increase in dividends per holding in my unregistered account, TFSA, and RRSP at YE16 vs YE15
1:1 CAD/USD exchange rate I use to calculate forward dividend income in CAD
1.34:1 CAD/USD actual exchange rate on December 30, 2016
36 dividend increases announced in my investment holdings during 2016
0 dividend cuts announced in my investment holdings during 2016
2 dividend freezes announced in my investment holdings during 2016 (RCI.B and CJR.B)
Here's a graph showing the slowing rate at which I'm growing my expected forward dividends


Return Metrics
15.95% internal rate of return for irregular cashflows (XIRR) of my portfolio in 2016
16.15% benchmark total return (33% SDY return 2016 + 67% CDZ return 2016)
26.43% increase in portfolio value at YE16 vs YE15
42.27%, 39.2%, 4.39% increases in value for my unregistered account, TFSA, and RRSP at YE16 vs YE15.

Transaction Metrics
39 total buy and sell transactions conducted in 2016
26 buys consisting of 20 long-term buys and 6 short-term buys
13 sells consisting of 5 long-term sells and 8 short-term sells

Blogging Metrics
48 total blog posts in 2016 (averaging 0.92 posts per week)
115 comments on my 2016 posts (about half by me, likely including some spam I haven't cleaned up)
$18.25 cost of renewing this domain name for a year
67% more page views in December 2016 vs December 2015
904 Twitter followers today vs 299 at December 30, 215 (thank you all!)
3 most popular posts this year (ranked 1st to 3rd by pageviews)
1) My ETF Experiment - Bought VCN and VXC (love the irony of this being popular)
2) 12 Monthly Paying Canadian Dividend All-Stars (understand how this would be popular)
3) 5 Common Mistakes Dividend Investors Make (people love hearing about my screw-ups)
#1 least popular posts this year
1) Financial Lessons from the Trailer Park Boys (one of my two favorite posts to write along with this unloved gem)

Expenses & Passive Income Metrics
7.1% forecast error, having never tracked my expenses, the amount I underestimated my 2016 total expenditures at the start of the year
51.7% of my 2016 expenses covered by my dividend and trading income (half way to FI!)
12 categories of expenditures identified in the pie chart below:

Diversification Metrics
Updating a post regarding diversification from over a year ago, it's fun to see the movement within my investment holdings:



Fantasy Dividend Stock Picking Metrics
After finishing 3rd in R2R's 2016 single stock picking contest by picking TransCanada Corporation (39% return in 2016), deflating my ego by revisiting my 10 Canadian dividend all-star stock picks in different sectors seemed warranted:



Hopefully I didn't overwhelm you with too many numbers, tables and graphs. If there are any figures or pictures that particularly peak your interest, let me know via comments and I'll address them as best as I can.

Do you prefer numbers, tables or graphs???


Tuesday, December 27, 2016

December Transactions & January Watchlist

Although I have always felt obligated to report my monthly transactions here so as to hold myself accountable and clearly identify my investment holdings, I question the value add to my readers of reporting this information. Similarly, as helpful as I find it to have a watchlist heading a new month in order to focus my attention on a handful of companies, I wonder how my list of prospective companies is of any great importance to a reader. Therefore, in an effort to maximize my efficiency blogging, while halving the number of potentially useless entries for you to read, my experiment this month is to combine these two entries.

December Transactions

Buy #1 - Enercare Inc. (TSE: ECI)

After initiating a half-position in Enercare last month, I added more shares on the first of December that resulted in an "almost-full position" in my unregistered account.  I was able to bring my average cost down on this Canadian company that is successfully integrating a US acquisition that should provide further stability to their cashflows gained from renting, servicing, and selling hot water tanks and air conditioning units. With a dividend yield over 5% and having grown their dividend by 10% early last summer, I remain open to adding more shares of this company as indicated below in my January 2017 watchlist.

Buy #2 - Life Storage Inc. (NYSE: LSI)

Although the selloff in US REITs that I anticipated after the federal reserve bank increased rates by 25 basis points never materially to the extent I hoped, I was able to add a couple more shares to my position in Life Storage at a 7% discount to my initial purchase price. With a P/FFO of approximately 19X, Life Storage is one of the more reasonably priced REITs in the self-storage space. The December 21st purchase completed my position in this company.

Donation - RioCan REIT (TSE: REI.UN)

Effective December 23rd, I made a donation of some of my RioCan shares to Food Banks Canada. By donating some shares of  RioCan from my unregistered account, I accomplished four objectives:
1. Supported a worthy cause that I care deeply about.
2. Avoided paying a capital gain on shares on which I could not have accurately calculated my adjusted cost base due to shotty record keeping in my early investing days (the early 2000s).
3. Lowered my 2016 tax bill via a donation to a registered charity and my future tax bills due to the higher taxation of REIT distributions vs dividends.
4. Started to decrease my position in a company whose management seems more interested in empire building than acting in the best interest of their shareholders.

January 2017 Watchlist

I remain very open to adding to my investments in Enercare Inc. (TSE: ECI) and Emera Inc. (TSE: EMA) in my unregistered account. Some of the reasons I enjoy Enercare are outlined in my justification of my recent buy, and I will add that I would like to close my position in the company before pausing to consider if I would choose to go overweight. Emera is interesting to me since it provides additionally exposure to the utility sector at a fair P/E multiple of ~18X. Although I'm not crazy about their recent $300M+ secondary issue, I realize that they need to fund an aggressive capital investing schedule while keeping their targeted capital structure in place.

Part of my 2017 contribution to my tax-free savings account (TFSA) will be used to complete my position in Canadian Apartment Properties REIT (TSE: CAR.UN). Holding this REIT in my TFSA allows me to be a passive landlord in a growing portfolio of apartment rentals across Canada and collect monthly distributions tax-free equaling approximately 4% per year.  Although I would like to add to my position in Toronto-Dominion Bank (TSE: TD) with another part of my 2017 TFSA contribution, I'm not crazy about paying a 52-week high price for this bank. I'll likely hold-off and wait for a chance to pick it up on a dip.

With the excess cash inside my RRSP, I would consider adding to my position in the Keg Royalties Income Fund (TSE: KEG.UN). Their three cent per share special dividend in December further demonstrates to me that unlike at RioCan, management of the Keg Royalties Income Fund takes their duty seriously to act in the best interest of the shareholders. Since I have yet to formally mention it in a watchlist, I am also interested in Brookfield Infrastructure Partners (TSE: BIP.UN) for possible investment in my TFSA or RRSP. I think the Brookfield empire is exceptionally well-managed, I would enjoy adding exposure in the infrastructure space for diversification purposes, and BIP tends to overachieve their dividend growth guidance of 8% per year. That said, I have a difficult time estimating a fair price for this company and find it frustrating that every time shares inch toward a 4% distribution yield, they inevitably bounce up 10% before I have sufficient conviction to act. BIP could very well end up in my "too complicated" pile of discarded opportunities.


My investment holdings page has been updated to reflect my three December transactions and I will keep it updated until my next transaction/watchlist entry. Since this will likely be my last post for 2016, I wanted to wish everyone a restful holiday season and a prosperous 2017!


What stocks are you considering heading into 2017???