Wednesday, February 25, 2015

From Credit Analyst to Equity Analyst and Back Again

     When reading various dividend blogs, I'm always curious as to what their owners do as a day job. My personal observation is that many dividend bloggers are in the computer and engineering fields. These individuals use their ample technical, mathematical, and model building skills in order to analyze investments. I'm extremely lucky to work full-time as a credit analyst for a fantastic organization. At a high-level, I source, examine, and evaluate quantitative and qualitative data in order to determine a company's ability and willingness to pay their suppliers. Although I don't consider my technical skills particularly strong, nor have I ever bragged about my mathematical abilities, I think my day job helps me better analyze companies for potential investments.
     As a credit analyst, one of the most important functions I perform is a liquidity analysis on the business I'm analyzing. Even without complete financial information, it's essential to determine if a company generates sufficient cash to pay its suppliers. Over the short-term, a company may access debt or equity markets, sell assets, or increase their bank facilities in order to meet their obligations. In the long-term, cash is king, just as it is in dividend sustainability analysis. Ideally, I like to see businesses that generate sufficient free cash flow (which I would define as cash from operations less CAPEX and dividends) to not only pay their current obligations, but to reward their owners as well. Speaking as an owner of 26 quality companies, rising free cash flow makes me happy since I associate it with growing dividends in the future.
     The hardest aspect of my day job is assessing management's willingness to pay their suppliers. I've seen numerous cases of companies that had the funds to pay their suppliers, but instead chose to finance pet projects, make unsustainable payments to their owners, or ignore their contractual obligations. A company's payment history, including the course management takes when times are tough, is the best indicator of a company's willingness to pay their suppliers. Similarly, as a dividend investor, I like to look at a company's payment history to see how they treated their shareholders during the last valley in their business cycle. Did they continue to pay (and even hike) dividends? Or did they take the opportunity to cut the dividend and blame industry conditions for their lack of foresight?  Most business operate in cyclical industries, and knowing how management will perform and react when times get tough helps me to assess the safety of the current and future dividend payments.
     The great majority of my dividend growth holdings pass the grade of credit analysts, as evidenced by the number of investment grade companies I own in my portfolio. Of my nine US holdings, only Omega Healthcare Investors is below investment grade (and only by one notch at BB+). Similarly, of my 17 Canadian holdings, 13 of 14 are investment grade rated (Corus is one notch below at BB+) and three holdings don't have credit ratings.
     As a credit analyst and dividend growth investor, I feel my experiences in both my job and hobby helps me improve my process and results in the other.

Sunday, February 22, 2015

Coca-Cola Boosts Their Dividend

     I haven't drank a glass, can, or bottle of Coca-Cola since I bought some stock in the company at the start of 2014.  That hasn't stopped me from benefiting from my second dividend increase in just over a year in this global juggernaut. The company announced an 8% dividend increase this past week, boosting their dividend from $0.305/share to $0.33/share paid quarterly.
      As a Canadian who seeks global diversification through buying US equities in my RRSP, Coca-Cola definitely fits the bill as over half their sales and about three-quarters of their profits are derived outside North America. Their global numbers are very impressive with over 3500 brands, including 20 brands that generate in excess of $1B in revenue.
      The company faces headwinds such as a strong US dollar, tepid growth, and changing public tastes away from sugary drinks. To help overcome these challenges, management has focused on cutting costs, diversifying away from cola into teas and juices, and driving incremental growth through selective acquisitions.
     With the dividend yield hovering around 3.1%,  I'll continue to hold my shares in this dividend aristocrat who has increased their payout for 53 straight years.

Friday, February 13, 2015

Cisco Systems and TransCanada Boost Dividends

     A couple years ago, Cisco missed analysts' consensus Q2 estimates, and their stock plunged about 10% that morning. Since I was looking to add an IT component to my portfolio, and large US companies were the best way for me to get that exposure, I left work and walked to the public library in the freezing February cold to buy a stake in Cisco. Cisco is a worldwide leader in networking, and their products and services have transformed the way we communicate and connect. More importantly for a dividend growth investor, after initiating a $0.06 per share dividend in February 2011, the company has went on to raise it yearly, up to $0.21 per share on Wednesday (a 10.5% increase over the last year). The current 2.9% dividend yield is well covered (current payout ratio ~45%), and the company has finally found its way back to growth, chalking up 7% higher revenues in Q215 vs Q214.
     As much as I've enjoyed holding Cisco, my relationship has been much rockier with TransCanada Corporation. Over the last two years, I've continually questioned if I want to hold a company that I don't feel acts in the best interests of its stakeholders or its shareholders. Regarding stakeholders, I'm not convinced the company's pipelines take into consideration the health, safety, and environmental impacts of various communities in their paths. As a shareholder, despite a pronouncement late last year to boost their payout ratio, I think the company has not taken the steps needed to truly enhance shareholder value (i.e. following the Enbridge/US model of selling income generating assets into a Yield Co.). Although I can't complain about the unrealized return I have made on my small TransCanada holding, or the 8.3% dividend hike today, I'm not sure I'll be in this company for the extremely long-haul. 
      My eight dividend raises in 2015 are helping me slowly achieve my goal of boosting my forward dividend income by $1,800 (or about $5/day). Through dividend increases alone, I'm 8.9% of the way to accomplishing my goal. Now if only the North American markets would plunge so I could put some of my monthly contributions to work to buy cheaper stocks... 

Friday, February 6, 2015

BCE Boosts Their Dividend

     Lately, it seems that I can’t get through a week without one of my holdings announcing a dividend increase.  Yesterday, BCE Inc. announced they were increasing their dividend by 5.3%. The dividend is supported by strong profitability (Q4 profit was up over 10%) due to a growing number of Internet and television subscribers. Bell provided guidance for their 2015 revenue growth (1-3%) and EPS of between $3.28 - $3.38 (vs $3.18 in 2014).
     I’ve held BCE shares for years, and think right now the company is a little expensive (P/E approaching 20X, dividend yield of 4.4%).  That said, I have to figure out a plan to move my shares of BCE held in my RRSP to my taxable account, as part of my portfolio transformation to minimize taxes.  My thinking is that I’ll soon sell my RRSP shares, and wait a while (a minimum of 31 days to avoid a taxable capital gain) in hopes that I can pick up the shares cheaper.  With a whole year to accomplish the move, I’m in no rush and can wait to see how things develop for BCE.
     There’s nothing else exciting to report this week.  As long as the dividend increases keep coming, I’ll be a very happy investor.  

Sunday, February 1, 2015

January Donation

     Not only was January a great month for my investment portfolio (with five dividend raises and two profitable short-term trades), I met my weight and blogging goals as well. After arriving home from Fort Lauderdale last night, I weighed in at 164.4 pounds...cutting it pretty close to the self-imposed maximum 165 pounds. Managing my calorie intake and exercise schedule is always tricky on the road, where healthful options aren't as plentiful. I'm also very happy to report I had six blogging entries last month, exceeding my goal of averaging one per week.
     With all the positives in January, I feel extremely lucky and blessed. As indicated in my goals for 2015 entry, one objective was to double the amount I gave to worthy causes. For January, I'm making a donation to the Canadian Cancer Society. Even though a great deal of progress has been made toward preventing, fighting, and living longer with cancer, there's so much work left to be done. Given my family history, I personally find cancer the scariest of all illnesses. Therefore, what better charity to support than one whose mission is "the eradication of cancer and the enhancement of the quality of life of people living with cancer." Here's hoping my donation will make a world without cancer less of a dream, and more of an eventuality.