Sunday, February 28, 2016

February Summary - 1 Buy (TD), 1 Sell (SU), 6 Dividend Raises

Even with the extra day this year, February seems to have flown by in a blur. It was a pretty quiet month for my portfolio of investment holdings, which is great as it means my transaction costs were low.  Below is a summary of my portfolio activity for the month.

After indicating in my February watch list post that I would like to complete my position in TD Bank inside my TFSA at a strike price of $50, I was fortunate to pick up enough shares to complete my position on February 9th at a price of *drum roll*....$50! I was happy to complete my position in early February as TD Bank increased their dividend by 7.8% on February 25th.

Although I stated in my February watch list post that I was looking to add to my small position in Suncor, when they announced their Q4 2015 results on February 3rd, I took some time to go through their financial results, and then sold my position on February 12th. Looking at their operating results and cash flows scared me given those less than impressive results represented a higher average price of oil than what the company has been dealing with thus far in 2016. Additionally, the recent rash of dividend cuts from other integrated oil companies along with Suncor's pending acquisition of Canadian Oil Sands has led me to question if Suncor can maintain their dividend at its current level, yet alone grow it. I remain open to revisiting Suncor in the future, but see too many near-term concerns to feel comfortable investing in the company at this time. 

After achieving an all-time high SEVEN dividend raises in December 2015, I was pleasantly surprised to receive SIX in February 2016. Upon further reflection, it makes sense that companies with fiscal years ending in December would be in a position to announce dividend increases reflecting their 2016 forecasts when they reported their 2015 results. My holdings that raised their payouts included:
- TD Bank grew their dividend by 7.8% ($0.51 to $0.55 per quarter)
- BCE Inc increased their dividend by 5% ($0.65 to $0.6825 per quarter)
- Royal Bank raised their dividend by 2.5% ($0.79 to $0.81 per quarter)
- TransCanada Corp grew their dividend by 8.7% ($0.52 to $565 per quarter)
- Cisco Systems blew my mind with a 24% dividend increase ($0.21 to $0.26 per quarter)
- Coca-Cola delivered a solid 6% dividend boost ($0.33 to $0.35 per quarter)

With my cash balance accounting for about 3% of my portfolio value heading into March, which is quite high for me, I expect to be more active adding to positions and possibly starting a new on next month. My March watch list post should be out on Tuesday, so stay tuned!

Which companies are on your watch list for March? 

Wednesday, February 24, 2016

US Dividend Payers vs Non-Dividend Payers

Ever wonder what the difference is between companies that pay dividends and those that do not? I ran two screens with the same six criteria and a variable seventh criteria (dividend yield > 0 vs dividend yield = 0). There were 24 companies that had a dividend yield greater than 0%, while only 14 companies who did not pay a dividend. Below are the common criteria to both screens along with the results of the queries.

- Listed on a major US stock exchange
- Market capitalization in excess of $1B
- Net Income 5-year CAGR > 10%
- Revenue 5-year CAGR > 10%
- P/E (trailing LTM) < 15X
- FCF LTM > 0

US Dividend Payers

US Non-Dividend Payers

Within the dividend blogging community, most of the names on the dividend payer list are pretty common. It is rare day that I do not see a tweet about Apple or T.Rowe Price on my Twitter feed. In contrast, outside of a couple of airlines (Ryanair and JetBlue) and American Axle who I used to analyze in a past job, the names on the second list are mysteries to me. Clearly, the non payers have been able to grow their businesses at impressive rates over the past five years, which makes me wonder why they have not rewarded their shareholders with a dividend. As as a dividend investor, the only justification I would find reasonable for not paying a dividend given such impressive business results is that a company that operates in a cyclical industry in which management must save during boom years to cover expenses/investments during down years.

My question to all the dividend investors out there is if there are any metrics that would convince you to invest in a company that does not pay a dividend? I look forward to reading your answers!

Sunday, February 14, 2016

Rogers Communications' Dividend Freeze - Sell, Buy, or Hold?

On January 27, 2016 while reporting their Q4 2015 results, Rogers Communications stunned investors and analysts by freezing their dividend. After annually raising their dividend for 11 years, Rogers' CEO, Guy Laurence indicated that the company was holding the dividend steady while they worked on lowering their leverage ratio (Total Debt / Equity = 3.1X at YE15).  Rogers' share price fell by approximately 8% from January 26th (pre-dividend freeze announcement) to January 28th as investors digested the dividend freeze. It is also note worthy that 3 of the first 5 questions management faced on their Q4 conference call related to the dividend freeze. Clearly, investors and analysts were caught off guard by Rogers' management decision to freeze their dividend. Given my own 'overweight' position in Rogers within my TFSA, I was among the stunned investors that had to quickly analyze my options. My thought process for evaluating my three options is outlined below.

Option 1 - Sell My Position

My knee-jerk reaction when Rogers announced their dividend freeze was to sell my position. While reading through Rogers' CFO answer to one analyst's question, I found myself particularly pissed off. The CFO indicated "Our value really comes from building a solid growing business rather than just a dividend play."  I took offense to the CFO implying that a "dividend play" was something negative, and refusing to acknowledge that many shareholders rely on Rogers to supplement their income. For the record, the value that I see in Rogers is creating a solid growing business in order to fund growing distributions to their owners. Every time the company steers away from their core business (telecommunications) in order to pursue management's media empire building fantasies (i.e. purchasing sports teams, overpaying for NHL broadcasting rights, etc.), I find myself looking to Rogers' competitors (BCE and Telus) as I fear my dividends from Rogers are being put in jeopardy.

Realizing that selling my position in Rogers would be based more on emotions than on fundamental analysis and facts, I held steady while contemplating my two other options.

Option 2 - Add To My Position

At its current price of ~$47.50, Rogers has a trailing P/E ratio of approximately 18X. For comparison purposes, Rogers' average trailing P/E ratio for 2013, 2014, and 2015 were 13.6X, 14.7X, and 18.1X respectively. Despite the pullback after announcing its dividend freeze, Rogers remains expensive based on their historic trailing P/E. Furthermore, as a dividend growth investor, I indicated in my 2016 goals that I only planned to add to my positions in companies who had increased their distributions in the past year. Since Rogers no longer meets that criterion, I decided that buying more Rogers was not an option for me to pursue.

Option 3 - Hold

After not letting my emotions get the best of me (selling), and quickly realizing that adding to my position was not in line with my investment objectives, I decided to hold onto my position in Rogers while management pursues de-leveraging. Using the S&P CapitalIQ estimates for Rogers' debt at YE16 (~$15B), free cash flow FY16 ($1.7B), and dividends for FY16 ($1B), my calculations have Rogers ending 2016 very close to their desired leverage ratio of 2.5X that they are looking to achieve before resuming increasing their dividend. If during the process of de-leveraging or after reaching the 2.5X leverage ratio management decides to do something out-of-line with their core business, I will look to sell my shares at that time.

In summary, I am in a "show me" mode with Rogers over the next year, as management has temporarily lost my trust. Considering a 5% dividend raise would have cost the company a relatively paltry $50M (compared to the cash flow numbers above), and management had numerous other options at their disposal to fund a dividend raise (i.e. selling non-core assets which have been rapidly accumulating over the last few years), I am hoping Mr. Laurence and his management team remember to serve their owners' best interests and not pursue their own media empire building dreams.