Wednesday, March 29, 2017

My Six Investment Transactions in Q117

During the first quarter of 2017 I made four purchases and two sales in my investment holdings.  Excluded from those six transactions are the ETF purchases of VCN and VXC for my son’s Registered Education Savings Plan.  Below is a brief recap of my six transactions during the quarter.

Buy – Canadian Apartment Properties REIT (TSE: CAR.UN)

In mid-January, I increased my stake in Canadian Apartment Properties REIT inside of my TFSA.  Adding to my holding in this great company was a simple decision for me as I see it as a way to collect a 4% yield on a high-quality, well-diversified portfolio of rental properties.  In late February, the REIT announced a 2.4% distribution increase.

Sold – Alaris Royalty Corp. (TSE: AD)

On February 10th I sold my remaining shares of Alaris Royalty in my RRSP. Even though my reason for selling was to avoid over-exposure given my full position of Alaris in my unregistered portfolio, this was still a difficult transaction for me. Although I remain confident in Alaris’s management and consider the company an excellent long-term investment, work needs to be done to turn the page on some of their recent mistakes. With plans to hold mostly US companies inside my RRSP, the timing seemed right to sell my Alaris shares.

Sold – Rogers Communications (TSE: RCI.B)

After Rogers reported strong results in late January and failed to raise their dividend for a second straight year, I decided to sell a small part of my position in mid-February.  Beyond the failure to raise their dividend for a second year in a row, I was upset that the company let go a truly great CEO in Guy Laurence since Rogers family members didn’t agree with the way he was running the business. Management now seems to be waiting for Joe Natale (former CEO of Telus) to come aboard this summer before making any strategic decisions.  Luckily, my Rogers position is in my TFSA, so I didn’t have to pay any capital gains tax on the sale.

Buy – Enbridge Inc (TSE: ENB)

One of my plans for 2017 involves adding to investments that I’m comfortable in as a way to slowly add to these positions. After Enbridge announced a 10% dividend hike in January and indicated that they were likely to increase their payout again after the Spectra acquisition closed, I decided that buying a bit more Enbridge made sense.  On February 24th, when the stock dipped to $54.50 a share, I bought a small amount in order to add to my position.

Buy – Keg Royalties Income Fund (TSE: KEG.UN)

In late February, I was able to complete my position in the Keg Royalties Income Fund inside my RRSP. Not only does the Keg position pay a 5.5% distribution, they also have a history of declaring special dividends in December, which I benefited from in 2016. 

Buy – Tanger Factory Outlet Centers (NYSE: SKT)

Rarely do I take to Twitter to brag about buying a particular stock, yet that was the case on March 10th when I initiated a position in Tanger in my RRSP. After watching Tanger for years and patiently waiting for a situation where the company was valued at less than 15X P/FFO and I had enough cash inside my RRSP to take advantage, the stars were aligned! Now I can only hope that Tanger stays in the $31-$33 range for a while so that I can use my annual RRSP contribution to snap up some more of this exceptionally managed REIT.

Since part of my plan for 2017 is to keep transaction costs low, I'm happy with the six transactions above given it compares favorably with busier quarters historically. The lack of any short-term trades helped keep the number of transactions down. The only transaction that I'm second guessing is selling a small portion of my Rogers position. I feel that the transaction might have been based more on my frustration with the Rogers family and lack of strategic direction being taken by interim management. I'll try not to let emotions enter my investment process to the same degree during the remainder of 2017.

What buy or sell decision that you made during the first quarter of the year are you most proud of?

Friday, March 24, 2017

Imperial Oil - 22 Years of Dividend Growth

As I work my way down the Canadian Dividend All-Star list, I review certain companies that I would never consider purchasing due to my own lack of knowledge relating to their industry.  Such is the case for Imperial Oil ("Imperial"), an integrated oil and gas company with a 22 year history of dividend growth.

Company Overview

Headquartered in Calgary, Alberta, Imperial Oil was founded in 1880 and is a subsidiary of Exxon Mobil Corporation. Imperial explores for, produces, and sells crude oil and natural gas in Canada. The company reports on three business segments, namely upstream (25% of FY16 revenues), downstream (71% of FY16 revenues), and chemicals (4% of FY16 revenues). Many Canadians are familiar with the company's 1,700 Esso service stations throughout the country. 


Imperial last increased their dividend by 7% in April of 2016. The company's stock currently yields about 1.5%. The dividend payout ratio is relatively modest at 24% of FY16 earnings. The 3, 5, and 10 year dividend growth rates are decent at 6.4%, 6.0%, and 6.3%. 
% annual average growth planned through 2021
The current share price of ~$41 equates to a trailing P/E of 16X. This value is slightly high given the stock has traded in the 10-14X range for most of the past 5 years. Looking at EV/EBITA leads to a similar conclusion, with the company currently trading at 20X in contrast with their 5-year average in the 8-12X range.


There are a couple key reasons why you would consider adding Imperial Oil to your investment portfolio.

1. Financial Flexibility
With an AA+/Stable corporate credit rating, Imperial has a strong balance sheet which it has leveraged during the prolonged period of lower oil prices. An example of the financial flexibility afforded to the company is the 2016 sale of hundreds of Esso stations to operators in Canada that fetched the company ~$3B.
 2. Ownership by Exxon Mobil
Exxon Mobil Corporation owns 69.6% of Imperial’s common stock. The majority ownership by the powerful Exxon Mobil Corporation is seen as beneficial since Imperial can leverage Exxon’s management, technology, connections, and expertise in order to help their business prosper.   

I have a hard time classifying Imperial’s dependence on the price of oil as a catalyst or drawback. Although commodity businesses tend to scare me as companies have to be price takers in an environment where the price is out of their control, I can see the attractiveness of an integrated oil company like Imperial if you believe that the price of oil will rise. With only two public large cap, integrated oil companies in Canada (Imperial and Suncor), betting on the long-term rise in oil prices would be possible on either company, and you could even collect a dividend while you wait to see if your thesis proves correct. However, if your thesis proves false, the share price of Imperial is likely to fall in tandem with falling oil prices.  


Beyond the paltry current dividend yield and their dependence on the price of oil, there are a couple of other issues to consider before adding Imperial to your portfolio.

1. Dependence on CAPEX for growth
Imperial has two options to grow their business. They can either conduct research and drilling to find new oil wells, or they can buy established wells from other companies. Both of those growth options are costly. Imperial went from spending $5.3B on CAPEX in 2014, to $3B in 2015, to a scant $1.1B in 2016 as oil prices fell. With management providing guidance of $1B of CAPEX in 2017, it would seem that Imperial is simply looking to maintain their position and not grow until the price of oil recovers.  In contrast, Suncor’s management has been investing by buying other businesses while the price of oil is low with an eye toward future growth.
2. Limited free cashflow to fund growth projects
The main reason that Imperial has cut CAPEX to a maintenance level over the past two years is that their cashflow from operations has decreased substantially from $4.4B in 2014 to $2.0B in 2016. Since the dividend requires funding of ~$500M and maintenance CAPEX is about $1B, there is currently little left to fund growth projects.


When reviewing the portfolios of other Canadian dividend bloggers, Imperial isn’t a name that comes up frequently. Some of the key reasons for its lack of popularity are the company’s reliance on the price of oil, the low current dividend yield, and uncertainty regarding future growth prospects. As might be apparent from above, I don’t foresee adding Imperial to my portfolio anytime soon and would be more likely to consider Suncor in the integrated oil and gas sector. 

Would you consider adding shares of  Imperial Oil to your portfolio?

Thursday, March 16, 2017

Empire Ltd & Metro Inc - 22 Years of Dividend Growth

Working through the Canadian Dividend All-Star list, I noticed that two of the companies with 22-year streaks of raising dividends operate grocery stores. Therefore, it seems logical to review Empire Company Ltd ("Empire") and Metro Inc ("Metro") together.

Company Overviews

Empire has more than 1,500 grocery stores across Canada opertaing under the Sobey's, Safeway, IGA, Foodland, FreshCo. and Thrifty Food brands and 350 gas stations. The company also holds a 41.5% equity interest in Crombie REIT which is a publicly traded grocery and store anchored shopping center Real Estate Investment Trust. Empire also has an equity interest in Genstar, a residential property developer in Canada and the United States. 

Metro operates or supplies a network of over 940 grocery stores across Canada under banners including Metro, Metro Plus, Super C, Food Basics, Adonis and Premiere Moisson. The company also operates 260 drugstores under the Brunet, Metro Pharmacy and Drug Basics banners. 


Empire's last dividend increase of 2.5% occurred in June 2016. The company's stock currently has a dividend yield of ~2.3%. The net loss of $3.00 per share for the last twelve months leads to a negative payout ratio. The 3, 5, and 10 year dividend growth rates are impressive at 6.7%, 7.4%, and 7.7% respectively. 

Metro increased their dividend by 16.1% in January 2017 leading to a dividend yield of ~1.6%. The earnings payout ratio is 27%, in-line with the company's dividend policy of paying out 20-30% of the previous year's earnings before extraordinary items. The 3, 5, and 10 year dividend growth rates are high at 18.9%, 17.6%, and 15% respectively. 
% annual average growth planned through 2021

Given Empire's negative net earnings in the past 12-months, it makes more sense to focus on the EV/EBITA multiple for them. The company currently has an EV/EBITDA mulitple of 7.3X which is in the middle of their 5-year range of their 5.2X - 9.5X. 

Metro currently has a trailing P/E of 16.6x which is in the middle-to-upper end of the 5-year range of 10X - 19X. Looking at EV/EBITDA of 10.7X leads to a similar conclusion when comparing to the company's 8X - 12X 5-year range. 


In addition to the higher initial dividend yield, here are a couple additional reasons why you would consider adding Empire to your portfolio as opposed to Metro. 

1. Turnaround Potential
- With a new CEO named in January 2017, and a new Chairman of the Board named in October 2016, Empire appears to be heading in a different strategic direction. It is also encouraging to note that a large portion of their net loss over the past 15-months was due to goodwill impairment charges, as the company's past mistakes were written off under previous management. 
2. Real Estate Holdings
- Empire's 41.5% equity interest in Crombie REIT is worth approximately CAD $500M. The Crombie investment along with that in Genstar could provide Empire with additional liquidity and leverage if it was required in the future. 

Here are two reasons why you might consider sacrificing the initial higher yield associated with Empire's shares in order to instead invest in Metro.

1. Less Volatility due to Operational Effectiveness
Compared to Empire's stock price which has swung between $14.74 and $22.72 in the past year, Metro's stock price has been more consistent within a range of $38.00 - $48.19. One big reason for Metro's lower volatility is the superior operational effectiveness as is evidenced by same-store-sales rising 3.6% in FY16 vs a 0.2% same-store-sales decrease at Empire.
2. Formalized Dividend Policy
Not only does Metro's formal dividend policy clearly state their target payout ratio, it also provides comfort to potential investors that management views the payout as a priority. Empire's lack of a formal dividend policy could be a potential red flag if the company continues to experience operational and financial challenges that call into question management's commitment to their dividend.


In addition to some of the drawbacks of investing in either Empire and Metro identified above, the Canadian grocery market is very competitive and saturated as outlined below.

1. Traditional & Non-Traditional Competitors
Compared to Empire's $24B and Metro's $13B in annual sales, their largest competitor, Loblaw's earned a total of $46B in revenue last year. In many communities, Empire and Metro have to respond to any price cut that Loblaws implements in order to remain competitive. Beyond Loblaws, Empire and Metro must also compete for sales against Wal-mart (400+ locations in Canada), Amazon (in select cities), and other grocery chains/coops across the country.
2. Saturation of Grocery Stores
I've mentioned a couple of times on this blog that I live across the street from a Metro store which happens to have a Brunet drug store in front of it. If I expand the radius around my house to 5 kilometers on Google maps, there is a Super C (Metro's discount chain), A&P (Empire's full-price brand), Maxi (Loblaw's discount chain), Provigo (Loblaw's full-price brand in Quebec), and one large family operated grocer. It's important to note that I don't live in a major city (population ~55,000) where grocery stores are often even more prevalent.


Despite the fierce competition and saturation of grocery stores in Canada, I can understand why an investor would choose to add a defensive position in a grocery chain to their portfolio. Between Empire and Metro, it might be worth sacrificing a little current dividend yield in order to benefit from faster dividend growth and less earnings/stock volatility. If you would rather invest in the market leader, it would be worth looking into Loblaws Companies Ltd. (TSE: L) who have a five-year dividend growth streak of their own and a current dividend yield of ~1.5%.

Would you consider adding shares of  Empire or Metro to your portfolio?

Wednesday, March 8, 2017

My ETF Experiment Continued - Bought More VCN and VXC

In May of 2016, I described my ETF experiment of buying Vanguard FTSE Canada All Cap Index ETF ("VCN") and Vanguard FTSE All-World Ex Canada Index ETF ("VXC") for my son's Registered Education Savings Program ("RESP"). Strangely, given the dividend growth orientation of this blog, that entry is the most popular post. Since I observed that my ETF investments in my son's RESP involve a low time commitment, low cost, low maintenance, and produce returns in-line with their respective indices, I continued the experiment in 2017 adding shares of both VCN and VXC. A quick overview of each ETF is provided below.

Vanguard FTSE Canada All Cap Index ETF (TSE: VCN) 
From Vanguard Canada's website, VCN "seeks to track, to the extent reasonably possible and before fees and expenses, the performance of a broad Canadian equity index that measures the investment return of large, mid- and small-capitalization, publicly traded securities in the Canadian market." The ETF currently holds 221 companies' stocks, has a P/E of 28.5X, a 1.9X P/B ratio, and a 11.6% ROE. The ETF's top three holdings are Royal Bank, TD Bank and Bank of Nova Scotia. The fund's top 10 holdings account for 39.1% of its net assets. The fund's management expense ratio is 0.06%.

Vanguard FTSE All-World Ex Canada Index ETF (TSE: VXC) 
Also from Vanguard Canada's website, VXC "seeks to track, to the extent reasonably possible and before fees and expenses, the performance of a broad global equity index that focuses on developed and emerging markets, excluding Canada." The ETF currently holds 9781 companies' stocks, has a P/E of 22.7X, a 2.1X P/B ratio, and a 15.6% ROE. The ETF's top three holdings are Apple, Microsoft, and Exxon Mobil. The fund's top 10 holdings account for 8.3% of its net assets. The fund's management expense ratio is 0.27%.

In order to bring the two positions in-line, I bought 44 additional shares of VCN compared to 37 shares of VXC.  The total transaction costs were $20. I will rebalance the portfolio when I make the 2018 RESP contribution. I continue to feel that an all equity portfolio diversified across the world meets the risk profile and investment objectives of my son who has a 15 year time horizon before he needs to start withdrawing the funds for college or university.

My Investment Holdings page is updated to reflect the additional shares of VCN and VXC I purchased for my son's RESP.

Do you own any index ETFs or index funds?