Thursday, May 5, 2016

Dividend Growth Stock Considerations for May 2016

As helpful as establishing a monthly watch list is for my investment process, I am finding these posts increasingly challenging to draft. The need to justify exactly why I am interested in a particular stock, establish a target price, and then sticking to my convictions has introduced much more discipline into my investing. These monthly watch lists hold me accountable to readers and to myself. Keeping that in mind, I wanted to provide additional disclosure regarding a transaction I undertook last month with one of the companies on my April watch list.

On April 5th, I established a full position in Granite REIT in my RRSP at my strike price of $37. As is usually the case when I invest in a company for the first time, after I purchased the shares, the share price continued to decline to just over $36 per share. However, before the company traded ex-dividend on April the 27th, the share price climbed up to over $38. After feeling guilty for quickly establishing a full position in the company before the share price dropped another 3% throughout the month, and realizing I could sell my shares and realize tax-free profits equal to multiple months of distributions, I sold my position in Granite on April 26th. Instead of including a full write-up on Granite again this month, like the Bank of Montreal, I am simply including the target price at which I would consider re-establishing my position below.

Bank of Montreal (TSE = BMO); Target Price = $70

Granite Real Estate Investment Trust (TSE = GRT.UN); Target Price = $37

Cisco Systems, Inc (NASDAQ = CSCO); Target Price = $26 (up from $24 last month)

Cisco is one of my 'almost full positions' that I would like to complete with my 2016 RRSP contribution. With the Canadian dollar recently climbing to $0.79 against the US dollar, I am more willing to pay a slightly higher price for Cisco that raised its dividend by 24% in February. My target price represents a trailing P/E multiple 13X and a dividend yield of 4%. Cisco's AA-/Stable and A1/Stable bond ratings show their financial strength and reflect their industry leading position. I will not hesitate to complete my position in Cisco if my target price is met before their Q3 earnings announcement on May 18th.

Tanger Factory Outlet Centers (NYSE: SKT); Target Price = $34

Given my two full positions in Omega Healthcare REIT and Realty Income REIT, I would like to add another US REIT that has asset holdings unavailable on the Toronto Stock. Tanger fits the bill as an operator of outlet malls with 42 locations across the United States and Canada. Last month, the company announced a 14% dividend raise that is well covered given the company’s FFO payout ratio of 59% in Q116.  In terms of valuation, at my strike price of $34, Tanger’s P/FFO multiple would be about 14X, and price to book value would be less than 6X. Both of the preceding values are lower than the company’s average valuation multiples over the past five years.


I would be remiss if I did not mention that I am still considering adding shares of Alaris Royalty and Enbridge Income Fund in my unregistered account.  As the cash in this account continues to grow, I have been thinking of ways to deploy it intelligently. The only other name I feel worth mentioning at this point is SNC Lavalin whose recent 10% decline in stock price is making it more interesting as a way of adding sector diversification and a tax friendly/lower yielding dividend growth stock in my unregistered account.


What companies are you considering investing in this month?

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