Wednesday, June 28, 2017

Q3 2017 Watch List & 2017 Goal Progress

Since the second quarter of 2017 was pretty hectic for me on the investment front with nine transactions, my Q3 watch list is more limited in scope.  With shares of 35 companies in my portfolio, an all time high, it would take a high quality company at a great value in order to add a new name to my list of investment holdings. Since my portfolio consists of my unregistered account, my TFSA, and RRSP, that will be the format in which I present my considerations.

Unregistered Account
After initiating a position in Aecon Group (TSE: ARE) in May, it was with mixed feelings that I saw the stock climb over 8% in the last month. The rise is share price put a temporary delay on my plans to slowly add to my position.  My attention shifted more toward Enbridge (TSE: ENB) and Enbridge Income Fund (TSE: ENF) as their prices have fallen along with oil prices. My main issue is that I currently own full positions in each of these related companies, and have to consider if going overweight makes sense from a diversification perspective. In terms of other companies that are on my radar, First National (TSE: FN), CIBC (TSE: CM), and Suncor (TSE: SU) are all interesting. First National and CIBC are both attractively valued, but don't help my portfolio diversification aspirations. Although Suncor would help from a diversification perspective, it's difficult for me to justify paying more than 40 earnings for such a cyclical company. If there was a dark horse that provides me diversification (into the insurance sector) and a fair value (P/E ~ 11X), it would Power Financial (TSE: PWF) which I have owned before, but is not a consistent dividend grower. Lastly, I have also considered re-initiating a position in Inter Pipeline Ltd (TSE: IPL) and then selling my Kinger Morgan position in my RRSP in order to avoid overexposure to pipelines.

With very little cash left in my TFSA, I don't foresee any transactions unless they are short-term trades to increase my position in Brookfield Infrastructure Partners L.P. (TSE: BIP.UN). Brookfield management's record of dividend growth is outstanding, as is there record of accreditive acquisitions. 


Having decided to take a break from paying my discount brokerage $30 per quarter for a fair CAD/USD exchange rate, my plan for the third quarter is to use my cash and dividends to top-up my position in A&W Revenue Royalties Income Fund (TSE: AW.UN).  With a yield over 4.5%, and a P/E in the 20X range partely due to underwhelming first quarter results, I'm fine with adding to this position due to A&W's strategy of more urban locations throughout Canada.  The only US stock I would consider changing my plan for is Tanger Outlets (NYSE: SKT), as I find the long-term risk/reward equation favorable despite a slight recent run-up in share price. 

Since it's almost the middle of the year, it seems like an appropriate time to check-in on my simplified 2017 goal:

Increase forward dividend income by $2600 while achieving a dollar-weighted average organic dividend growth rate of at least 5%. 

I'm very happy to report that my forward dividend income is up by over $1000, while my dollar-weighted average organic dividend growth rate is currently 3.47%. If the forward income appears behind schedule, it's mainly due to growing my cash position in my unregistered account by about 125%. This reflects the difficulty I am having finding quality Canadian companies to invest in at fair prices. In contrast, if the 3.47% appears I am ahead of schedule, it is misleading as most of my holdings increase their dividends in the first half of the year. Although I think the 5% target remains achievable, it will require me putting capital to work in companies who raised their dividend by more than 5% while continuing to avoid dividend cuts.

Which companies appear at the top of your watch list for Q317 and how are you progressing toward your financial goals?

Saturday, June 24, 2017

Sector Concentration in Canadian Index Investing

As I grow older and my life becomes dominated with family, work, and other important commitments, passive index investing becomes more appealing. As documented regarding my two ETF experiment to index my son's registered education savings plan, I love the simplicity of quickly rebalancing the portfolio once a year. I don't track the ETFs at all and no monitoring is undertaken. The hard work to identify attractively priced stocks, accumulate a position over time, while monitoring company news for red flags is completely eliminated.

However, when I start to dig deeper into the composition of various Canadian indices that are featured in ETFs, the sector concentration is shocking. Even if you look at the broadest index in Canada, the S&P/TSX Composite Index, which covers approximately 95% of the Canadian equity markets, the combined exposure to financials (36.1%) and energy (19.9%) means 56% of your investment is concentrated in only two sectors. Key sectors for long-term growth such as information technology (2.9%) and health care (0.7%) are an insignificant portion of the index. With the top 10 holdings of the market capitalization weighted index accounting for 38.7% of the portfolio, returns are heavily reliant on financials (five of the top ten) and energy (three of the top ten). With 248 constituent companies, the market capitalization weighted index is heavily tilted toward the large financials, energy, and materials companies that dominate the Canadian landscape.


If the thought of including 248 companies is overwhelming, and you'd prefer to stick with the top 60 companies in Canada, maybe the S&P/TSX 60 Index would be a better fit. Although not as broad as the S&P/TSX Composite Index, the S&P/TSX 60 Index represents leading companies in leading industries. Its composition is also based on market capitalization, leading to even higher sector concentration in financials (38.4%) and energy (20.5%). The top 10 holdings represent 50.8% of the total index, reflecting high concentration in financials (five of top ten) and energy (three of top ten). Interesting long-term growth sectors such as technology (2.4%) and health care (0.4%) are basically a rounding error in the S&P/TSX 60 Index. 


As a investor with a strong preference for dividends, I also decided to examine the S&P/TSX Canadian Dividend Aristocrats Index. In order to be considered for this index, the company must have increased ordinary cash dividends every year for at least five consecutive years. Interestingly, instead of being weighted based on market capitalization, this index is weighted based on indicated annual divided yield. This means companies which higher dividend yields (i.e. Corus Entertainment, Northview REIT, Granite REIT, etc.) compose a higher percentage of the index. Despite this difference in weightings, financials (34.0%) and energy (18.3%) continue to account for over half of the index value. Information technology represents an insignificant 1.7% of the index, and there is no health care exposure. The top 10 holdings account for 22.1% of the index, reflecting the different weighting criterion.


The Canadian indices covered above clearly contain a great deal of exposure to the financial and energy sectors. One might go as far as to say that passive index investors in Canada are making very big bets for and against particular industrial sectors. Despite the simplicity and convenience that passive investing offers, I'll stick to dividend growth investing that allows me more control over the companies and sectors I'm investing in, even if it requires more work. Lastly, although I'm always a little hesitant when sharing the diversification of my portfolio by industry sector (see here for YE16), the above analysis makes me feel slightly better about my own sector diversification. 

How does your sector diversification compare to that of the leading Canadian indices???

Wednesday, June 7, 2017

Five Canadian Utility Companies with Growing Dividends 2017

In April 2016, when I was looking to add a utility company to my investment holdings, I reviewed Five Canadian Companies with Growing Dividends. After initiating a position in Emera Inc. (TSE: EMA) in October 2016, and completing my position in May 2017, it seemed like an opportune time to update my tables in order to determine if other Canadian utility companies warranted further consideration for dividend growth investors. Included below in the initial table from April 2016, and an updated version for June 2017.

April 2016

EPS Payout
# Years Div Gro
1-yr Div Growth
5-yr Div Growth
1-yr Rev Growth
5-yr Rev Growth
1-yr EPS Growth
5-yr EPS Growth
S&P Rating

June 2017

EPS Payout
# Years Div Gro
1-yr Div Growth
5-yr Div Growth
1-yr Rev Growth
5-yr Rev Growth
1-yr EPS Growth
5-yr EPS Growth
S&P Rating

Here are some quick observations about each of the companies.

- A material improvement in earnings makes Canadian Utilities (TSE: CU) look cheaper from a valuation perspective and decreased their payout ratio. Although the dividend growth remains consistent around 10%, the company will ultimately have to increase their revenues and earnings in order to maintain the impressive dividend growth record.
- Atco (TSE ACO.X) is Canadian Utilities' parent company, and their earnings improvement also led to a cheaper valuation and lower payout ratio. Sacrificing a lower current yield in favor of 15% dividend growth might lead an investor to favor Atco over Canadian Utilities.
- Fortis (TSE: FTS) looks to successfully integrate their material US acquisition in order to continue their long history of dividend growth. Over the past year, slower EPS growth has led to the company appearing a tad overvalued based on their historic P/E multiple.
- Emera (TSE: EMA) also looks to continue successful integration efforts in order to support revenue growth. The company's P/E multiple has expanded and investors expect management to announce another 10% dividend raise this summer.
- Algonquin Power and Utilities (TSE: AQN) continues to perform strongly as their valuation grows in response to an impressive record of revenue and EPS growth. Note that using EPS in the P/E multiple and payout ratio might be ill-advised as some sort of free cash flow measure is likely more apt.

Although none of the above Canadian utility companies leap off the page at me, I think they are priced fairly in the context of the overvalued Canadian market.

Do you hold or are you interested in any of the five utility companies outlined above? 

Saturday, May 20, 2017

Activist Investors, Special Prosecutors and Inconsistent Posting

Instead of droning on about one topic today, here are three things that are top of mind. 

1. Activist Investors Push Granite REIT to Change

When I initiated a position in Granite REIT last spring, it was their combination of cheap P/FFO valuation around 10X and the above-average 4.5% distribution growth that attracted me to the company. Granite's management had just wrapped up a strategic review and decided to stay the course instead of taking any drastic action (i.e. a large strategic acquisition or divesture, putting itself up for sale, or paying a material one-time distribution). My investment in Granite REIT was a way for me to gain exposure to Magna (Granite's largest tenant), which is one of a handful of world-class companies we have in Canada, at an entry yield about double what Magna was paying at the time (6% vs 3%). 

A couple weeks ago, FrontFour Capital Group and Sandpiper Group announced they had acquired a 6.2% stake in Granite REIT and released a plan to "unlock value at Granite REIT". FrontFour and Sandpiper have proposed two of their directors for the upcoming election of Granite's board of directors. At a very high level, Frontfour and Sandpiper argue that Granite trades at a substantial discount to its fair value due to a misunderstood asset base, strategic failures, and a loss of confidence in management and the Board. Granite responded somewhat on their Q1 2017 earnings call and more detailed via this proxy circular.

As a unit holder of Granite, the attention that the activist investors have shed on the company has been beneficial from a share appreciation perspective. Frontfour and Sandpiper raise some relevant issues concerning Granite's lack of strategic action, overcompensated management team, and misunderstood asset base. However, Granite's response to their dissident shareholders also makes some prevalent points about the returns they have been able to generate shareholders over the past five years in excess of the TSE REIT index, the lack of successful track records of FrontFour and Sandpiper within the REIT space, and the absurdity of some of the activists' suggestions (i.e. selling some major holdings around Toronto to show stakeholders how much they are truly worth). 

With both sides continuing to argue their respective stances, I'm taking a wait a see approach as this is the first time one of my holdings is the target of activist investors. Even if FrontFour and Sandpiper are able to elect their two nominated directors to Granite's board, I question if they could push their agenda given strong opposition from the majority of directors. My view is that the activists have brought some additional coverage to Granite, forcing the company's management to justify their past inaction and firmly outline the path they are pursuing for future growth.

2. Special Prosecutor and Impeachment Talks Create Buying Opportunity

For those of you who keep close track of my Investment Holdings, you may have noticed some recent changes. The past week was officially my busiest ever, with three buys including initiating a new position in my Tax Free Savings Account. The combination of letting my cash build up to an uncomfortably high level (~8% of total holdings) and the downward momentum caused by the appointment of a special prosecutor to review the Trump Administration's ties to Russia both facilitated my three purchases. I'm considering another couple of investments outlined in my Q2 2107 watch list, and hope for continued volatility in the markets in the coming weeks. 

3. Inconsistent Posting Schedule

As I struggle to meet my once a week posting goal, I feel that I owe an explanation to readers. Beyond my current lack of ideas for interesting posts, more time spent preparing for the software launch I've been working on at my job over the past two years, and quality time required by my super energetic near three year-old son, I have another great reason for my inconsistent posts. My wife and I are expecting our second child early this July. There have been numerous preparations for the birth of our baby daughter that have caused a shift in my priorities. Although I enjoy writing as an outlet and have always found it beneficial to review my decisions relating to past stock purchases/sales, with the more outward focus of this blog, I'm finding less time to make quality posts that would provide value to readers beyond myself.  My expectation is that the number of entries I write will continue to decrease over the summer when our daughter arrives and likely continue on a downward trajectory for the foreseeable future. 

Did you take advantage of the US market selloff this week to make any stock purchases???

Tuesday, May 9, 2017

Is Buffett's Partial Exit of IBM a Warning Sign?

Last Friday, I was surprised to hear about Warren Buffett's decision to sell roughly a third of Berkshire Hathaway's stake in IBM. Although I admittedly don't hold Mr. Buffett in as high regard as other bloggers, I still respect his long-term track record as a stock-picker and empire builder. When justifying his partial sale, Buffett indicated that his assumptions relating the the valuation of IBM had changed since he started buying his stake six years ago and also referred to the company's strong competitors. Much like his defense of partnering with 3G Capital on recent deals, I found his justification for selling a third of his shares in IBM lacking in substance.

Instead of getting stuck in the weeds and overanalyzing Buffett's recent trade, I found a thought provoking tweet from one of my favorite dividend bloggers @dividendgrowth

For those who thought IBM was a great deal at $159 before Buffett disclosed his partial exit, clearly the 5% discount should make the current valuation even more compelling. The trailing P/E of about 12.5X and the dividend yield of 3.9% must look extra tempting to investors who choose to ignore the whims of America's most famous investor. The above tweet made me wonder if Buffett makes the same mistake as me when selling his investments too early.

Each quarter when Berkshire Hathaway files a 13-F form which discloses positions in their equity portfolio, there's a site that summarizes the filing to separate which positions Berkshire has added to and which positions have shrunk. Looking at the 2016 year-end filing, I thought it would be interesting to calculate the year-to-date total return on the eight positions that Berkshire materially decreased or exited in the quarter ending December 31, 2016. The year-to-date total returns (including dividends) for these eight positions is shown below.

Wal-mart (WMT) = +10.9%
Verizon (VZ) = -10.5% 
Liberty Media B (LMCB) = +9.8%
Deere & Co (DE) = +9.9%
Kinder Morgan (KMI) = -1.5%
Lee Enterprises (LEE )= -20.7%
Liberty Media A (LMCA) = -0.5%
ServiceNow (NOW ) = -15.8%

Average return of stocks sold = -2.3%

Granted, five months of returns calculated from a small sample of eight stocks doesn't provide sufficient evidence to conclude that Buffett does a better job selling his investments than the average retail stock-picker. One must also consider that once the 13-F of Berkshire is made public, certain investors and funds who blindly follow Buffett's every move scramble to sell the shares that he divested. It's also worth noting that the volume of shares associated with Berkshire's positions can create downward pressure and momentum on a company's share price when Berkshire starts shrinking their position. Despite all those disclaimers, the above results do partially support Buffett's status as seasoned investor. Although no one can consistently sell stock at the highest price, nor can they buy it at the lowest price, but avoiding big losers helps investors conserve their capital in order to continue making investments.

Although IBM has never been at the top of my watch list due to shrinking revenues and EPS supported mainly through share buybacks, in my view, Buffett's partial exit doesn't make it a more appealing long-term investment. Like many large-cap companies, IBM must determine how to grow their top line or at the very least maintain it in order to appease shareholders without adding excessive debt to their capital structure. Will IBM find that elusive top line growth without such a large investment of sticky capital from Warren Buffett? The answer to that question will ultimately determine if IBM's current stock price represents a good value or a value trap.

Does Warren Buffett's investment in a company make you more or less likely to invest in that company? 

Thursday, May 4, 2017

10 Canadian REITs With Growing Distributions

As one might guess from the growing number of real estate investment trusts ("REITs") in my investment holdings, I favor the REIT sector as it provides a generous initial yield and above-inflation distribution growth, without the headaches associated with active management of rental properties. Given my current difficulty finding compelling valuations in the Canadian stock market and with a little extra cash inside my TFSA and RRSP (where REITs should be held in order to minimize income taxes), it seems like an opportune time to update my entry from March 2016 that consisted of 10 REITs that had raised their distributions in the past 12 months. To slim down the list at May 2017 and to ensure that the REITs were fairly liquid, I only included companies with market capitalization in excess of CAD $1 Billion. The results were further narrowed by insisting that the REIT generate positive FFO over the past 12 months. The resulting screen with REITs ranked via their current distribution yield is presented below.

I own shares in three of the REITs above (H&R, Granite, and Canadian Apartment Properties), but would consider adding a couple of the other companies to provide geographic and industry sector diversification. Included below are my quick thoughts on all ten REITs.

H&R REIT - Likely the most diversified REIT by sector (industrial buildings, shopping centers, office properties), but with the slowest growing distribution.
Granite REIT – Concentration risk given Magna is largest client. Gives exposure to auto parts industry at a higher yield than through Magna directly.
Brookfield Property Partners – Cheapest priced REIT with a diversified portfolio of properties managed by the experienced team at Brookfield. Undesirable exposure to retail and office properties given my current REIT holdings.
Smart REIT – Owns a portfolio of shopping centers across Canada, but unlike Riocan, they tend to raise their dividend yearly.
Choice Properties – Exposure to grocery store giant Loblaws at a good initial yield and at a fair price. Downside is the obvious concentration in Loblaws properties.
Boardwalk REIT – Residential housing REIT that has high exposure to the Alberta economy. It is priced relatively cheap compared to other apartment/residential REITs.
CT REIT – The most expensively valuded REIT owns properties used by Canadian Tire which is a strong brand within Canada. Waiting for a better price to buy is advised.
Allied Properties – Own urban office properties and has a record of slowly raising its payout. Waiting for a better entry point is advisable given how close it is trading to its 52-week high.
Canadian Apartment Properties – Diversified exposure to apartment properties across Canada and a growing international portfolio. Currently expensive and a slow growing distribution.
Canadian REIT – Longest record of annual distribution increases of any REIT in Canada at 15 years. Fairly priced but low yield and slow growing distribution. 

Are there any Canadian REITs that you would consider buying at their current prices?

Friday, April 28, 2017

The Power, Potential and Pitfalls of Dividend Growth Investing with Coca-Cola

Part of my process for monitoring my investment holdings involves subscribing to news alerts related to the companies in my portfolio. Earlier this week, this article related to the impact that Coca-Cola's stock on various college endowments appeared in my news feed. To summarize the article, four colleges have a large portion of their endowment funded by the Lettie Pate Evans Foundation, which holds almost exclusively shares in The Coca-Cola Company. Due to Coke's growing dividends, hundreds of millions of dollars have been provided to the endowments of the colleges. The article triggered mixed emotions for me, as I feel it accurately depicts the power, potential and pitfalls of dividend growth investing.

The Power

With 95% of their assets invested in shares of Coca-Cola, the Lettie Pate Evans Foundation grew their assets from $7M in 1953 to $3B today (including 67 million shares of Coke). The approximate 10% compounded annual rate of return was due to share price appreciation, 55 years of dividend growth, dividend reinvestment and share splits. It is fascinating that 1 share of Coke in 1953 yielded 1152 shares today through stock splits alone!  

The power of dividend growth is reflected in the Evans Foundation generating approximately $100M of dividends on their shares of Coke. As the President of the Foundation indicates in the article "That [Coca-Cola] dividend has paid a lot of tuition over the years". As an example, Washington and Lee University expects to receive about $13M of dividends from their $400M investment in Coke through the Evans Foundation this year alone. 

The Potential

Given the long time horizons of endowment funds, dividend growth stocks such as Coca-Cola that consistently raise their payouts seem like the perfect investment. Much like early retirees aim to fund their expenses with dividend and interest income without touching their principal, endowments can use dividends to fund an increasing amount of scholarships and bursaries without impairing their capital base. The true challenge is to find quality companies to include in the investment/endowment portfolio that are capable of paying out higher amounts of their growing earnings via dividends for decades to come. Tat challenge leads to the primary pitfall evident for the Lettie Pate Evans Foundation and colleges mentioned in the article. 

The Pitfalls

The lack of diversification for the Lettie Pate Evans Foundation, with 95% of their assets invested in shares of Coca-Cola is terrifying. Berry College's 60% share concentration of Coca-Cola within their total endowment, the 29% concentration of Coke shares in Washington and Lee University's endowment, and even Georgia Tech's 25% concentration in Coke shares related to their endowment are equally alarming. I found myself perplexed reading that Georgia Tech, like most schools who benefited from the Lettie Pate Evans Foundation's Coca-Cola holdings does not consider that concentration when making asset allocation decisions for the rest of its endowment portfolio. Would these universities actually consider adding shares of Pepsico or Dr Pepper Snapple to their endowments while ignoring their high correlation to Coca-Cola? 

The quote that jumped out at me the most in the article was from the vice president for finance at Washington and Lee University indicating that "It's a great life jacket to have" when referring to the dividends generated by the Coca-Cola shares. Although it is easy to enjoy the growing stream of dividends derived from an investment, I think it would be wise for the vice president for finance to realize that past investment returns are not a guarantee of future success. As Coca-Cola's earnings have failed to grow in recent years, their payout ratio has increased, and future dividend growth will be challenging without a corresponding increase in earnings. I sincerely hope that the trustees for the Lettie Pate Evans Foundation and the various college endowments mentioned in the article make a greater effort to diversify their holdings in order to provide more stable funding in the future.

As dividend growth investors, we must harness the power of compound growth in dividends over time to realize the potential benefits of steadily rising passive income, without ignoring the pitfalls related to portfolio concentration and sustainability of payouts. As fascinating as it was to read how well the Evans Foundation and various college endowments had done due to their concentration in Coca-Cola shares, I found myself worried for the future prosperity of these institutions and the stakeholders they serve. 

What are your long-term views on Coca-Cola Co as an investment? 

Thursday, April 20, 2017

Q2 2017 Watch List

After purchasing shares in four companies during the first quarter of 2017, it’s time to identify which companies I am contemplating investing in this quarter.  Since my investment portfolio consists of my unregistered account, my TFSA, and RRSP, that will be the format in which I present my considerations.

Unregistered Account
I continue to look for an opportunity to complete my position in Emera (TSE: EMA), but am in no rush to do that given it’s up over 5% in the last month without any material changes to the company. I am interested in Aecon Group (TSE: ARE) as they would provide me exposure to the construction sector and also have a history of growing their dividends. Although the current P/E of 25X is a tad rich based on historical standards, any weakness in the share price would make this company quite attractive.  Lastly, I have been considering selling my shares in Corus Entertainment (TSE: CJR.B), waiting at least 31 days, and then buying them back. The tax loss this would create for me would be lucrative given I am running out of tax losses to apply to capital gains.

Although not particularly cheap given past and peer valuations, I will likely add a small number of shares of TD Bank (TSE: TD) that has a trailing P/E of 13.8X. As mentioned in previous posts, part of my plan for 2017 is to add to positions in which I am comfortable. Given the recent weakness in TD’s share price due to media reports of their aggressive sales practices, I feel this is an opportunity to bolster my position in my favorite Canadian bank. The other security I would consider adding in my TFSA and RRSP is Brookfield Infrastructure Partners L.P. (TSE: BIP.UN).   Although I feel late to the party on this company, when I looked at it from a P/FFO perspective (vs a P/E valuation), I see a much more reasonably priced company than I first figured. Their record of dividend growth is outstanding, as is there record of accreditive acquisitions.

Beyond BIP.UN, the most likely purchase in my RRSP during Q2 will be more shares of Tanger Factory Outlook (NYSE: SKT).  I hope the valuation stays below a P/FFO of 15X (about 13X currently) so that I can add to this well managed discount mall REIT.   In accordance with my plan to add to positions that I feel very comfortable in, I will likely make a small purchase of A&W Income Fund (TSE: AW.UN). This restaurant chain has reported impressive same-store-sales growth over the last two years, and I like their plans to add more restaurants in urban areas during the next five years. Lastly, I have been considering exiting my Kinder Morgan position (NYSE: KMI). The combination of a low Canadian dollar compared to the US dollar, stagnant oil prices, and the realization that I’m overexposed to the pipeline sector through my other Canadian holdings (TRP, ENB, ENF) have me considering moving on from Kinder.

As always, my watch list companies can change as events unfold, but the above encompasses what I am considering at the start of the second quarter of 2017. From a contrarian perspective, I am considering initiating a short-term position in Home Capital Group (TSE: HCG). When asking myself what's the worst that could happen due to OSC allegations of slow disclosure regarding unscrupulous mortgage brokers, I think the most likely outcome for Home Capital is paying some fines and possibly dismissing their current CFO. With shares selling at 6 times 2016 earnings, the company has an appealing short-term risk/return profile. 

Which companies appear at the top of your watch list for Q217?