Sunday, December 30, 2018

Goals, Metrics and Mistakes in 2018

In December 2017, when I set my aggressive goal to increase my forward dividend income by $3000 while achieving a dollar-weighted average organic dividend growth rate of at least 5%, I knew obtaining both facets would be a challenge. With plans to travel on December 31st, and no will to conduct another trade (19 this year is far more than I had planned on), I'm proud to share my final results: forward dividend income added was $3076 and dollar-weighted average organic dividend growth rate was 6.16%. As I approach a milestone amount of forward dividend income, I decided to slightly alter my goal  for 2019:

Increase forward dividend income by $3300 while achieving a dollar-weighted average organic dividend growth rate of at least 5.5%.

Since I've met my goals for the past couple years, I decided to make things harder in 2019. A 10% increase to both the forward income and growth rate seemed like enough to up the ante for the coming year.

Although I haven't been consistent with posting in 2018, I still spend a fair amount of time thinking about my investment process, searching for attractively priced stocks, trying to find ways to limit my negative behavioural biases,  assessing my results, and contemplating why I feel the need to generate ever increasing amounts of dividend income. Regarding the latter issue, sadly, I can't report any decent answers, which bothers me. As much as I'd like to say that posts will be more consistent and frequent next year, that probably won't be the case. Blogging has definitely fallen down my priority list as my two kids warrant much of my focus and attention when I'm home. That said, I was successful at writing about all 19 transactions in 2018 in my Transaction Journal, a small accomplishment in which I take some pride. 

Since I had a little down time today while the kids and wife were napping, I calculated some portfolio metrics which I thought would be fun to share. If you're not quite as nerdy as I am, feel free to skip over the below bullet points.
- My internal rate of return on my portfolio in 2018 was 3.6%, which beats my weighted benchmark return of -6.9% (36% US S&P Dividend ETF SDY + 64% Canadian Dividend Aristrocrat ETF CDZ). Most of the out-performance on the Canadian side can be attributed to Enercare and Enbridge Income Fund being acquired. Microsoft and McDonalds were very strong performers for my US holdings.
- My portfolio went up by 10.1% in 2018, about half my 2017 increase of 20.0%. Granted the last couple months of 2018 were a much more volatile and difficult period for the North American markets.
- The average dividend yield on my portfolio was 4.2% in 2018, slightly higher than 4.0% in 2017, and 4.1% in 2016. 
- The amount of cash I have in my portfolio at year end sits at 2.7%, identical to the 2017 figure, and much higher than the 0.9% figure from year end 2016. 
- The 38 stocks in my portfolio (a total unchanged since year end 2017) raised dividends 47 times in 2018. Realty income raised their dividend 5 times during 2018, while H&R REIT, Aecon, Rogers Communication, Keg Revenue Royalty, RioCan, and Life Storage didn't raise their dividend at all. 
- The Keg Revenue Royalty and Granite REIT both had special distributions during 2018. This is my first year ever receiving two special distributions. 

Two of the three mistakes I high-lighted in last year's entry, letting performance metrics drive behaviour and committing numerous behavioural investing errors, continued to be sore spots for me in 2018. Instead of boring you with the details, I'll give one example to show how I recently made those two mistakes simultaneously.
- In early December, when I knew how much I needed to reach my forward revenue goal for the year, I pre-calculated the impact of adding  small position in Alaris (a high yield, low dividend growth) on my dollar-weighted average organic dividend growth rate before pulling the trigger. After assuring myself that I'd still reach both goals, I went ahead and added back my position in Alaris for the umpteenth time. I shouldn't be as comfortable as I am with Alaris, but I'm in love with the management team whose goal to create a steadily growing, business cycle independent, income stream mirrors my own. Feeling some emotional connection to a stock is completely irrational and likely won't end well for me.

The other investment mistake I'd add to a long list I've committed is sticking to a plan when the environment is changing. I've long had an idea of which stocks I wanted to hold in my three accounts and continue to make changes to my portfolio to achieve the desired results. That said, when the market slumped the last couple months, I ignored some very attractively priced stocks and just kept making moves that were part of my long-term plan. There's probably a bigger issue at play here regarding my lack of flexibility and not trying to maximize my total portfolio return, which would put me in a better position regarding financial independence. That said, my results in 2018 were better than my benchmark, achieved my goals, and put me a couple steps closer to financial independence.

Now that I've over-analyzed my 2018 goals, performance metrics and mistakes, I look forward to reading about how everyone else did last year. Here's wishing you a happy, healthy and prosperous 2019!

Friday, November 9, 2018

C-Suite Executives from Five Canadian Companies Comment on their Dividend Policies

Part of my monitoring process for investment holdings is reading the transcripts of quarterly earnings calls. It's interesting to hear how a company's management views their dividend and what factors they consider prior to raising the distribution. Hot off the presses, here are how three CEOs and one CFO were thinking about their dividends, along with my peanut gallery quips.

Alaris Royalty Corp. Q3 2018 Earnings Call
Jaeme Gloyn
National Bank Financial, Inc., Research Division
"Okay, okay. Shifting to a different sort of question line. Obviously, a big question mark is around the
dividend. How are you looking at the dividend as it stands today? And what are the metrics or financial performance levels that you're looking to achieve before considering a potential increase?"

Stephen Walter King
CEO, President & Director
"Yes, we're in a very good situation with our dividend in that, as Darren mentioned, we've got the resets coming in January, and so that will get us down kind of at or below that 90% range. And then it will depend on new deployment after that in terms of a dividend increase. So if there is -- I would suggest if there's significant deployment, that, that would be something that we would look at. So it will be driven by that, but we're in a very good position. The payout ratio doesn't include anything from Kimco. We've got the new resets coming, so yes, it's a -- I think we're, for the first time in a little while, in a position to consider an increase if there's some good deployment here."

DiH Comment - Stephen's answer is thoughtful, logical, and shows how much he cares about getting Alaris's dividend growth back on track.

RioCan REIT, Q3 2018 Earnings Call
Sam Damiani
TD Securities Equity Research
"Just to follow on on the topic of the budget. It was about 11 months ago, we had the anniversary of your last distribution increase. Is that something we should expect to see again going forward?"

Edward Sonshine
CEO & Trustee
"I would think not. You know what, since we've gone out of the equity raising business a few years ago, we've learned that our capital is very precious. And whether we use that capital for NCIB, which has really been a significant return of funds. By the end of this year, I think we'll be looking in the neighborhood of $0.5 billion of money returned to our unit holders through that NCIB. We really don't feel the need to do that to increase our distribution. We're yielding I think -- it makes me ill to say this, but we're yielding about 6% right now, and I think we can put better use of those funds with the value creation we have undergoing here at RioCan."

DiH Comment - Oh the horror of being  a mall REIT that yields 6%! For context, the ~$0.5B of shares they've repurchased through the NCIB represent ~6% of their $7.5B market capitalization.  Here's hoping none of RioCan's investors are counting on Ed to give them a raise anytime soon.

Rogers Communications, Q3 2018 Earnings Call
Yong Choe
JP Morgan Chase & Co, Research Division
"Great. Just wanted to follow-up. Given the nice margin improvement and the guidance raise, how should we think about the dividend potential increase and maybe CapEx going forward? What should we be considering in terms of the margin increase versus the dividend?"

Joseph M. Natale
President, CEO & Director
"Sure. In terms of the dividend, kind of reaffirm what we said in the past. We're playing the long game. And Tony referred to it. We're playing the long game. This is all about sustainable, long-term dividend growth, and there's nothing new to report on that front overall."

DiH Comment - Rogers has de-leveraged past their initial target, improved margins, and is growing EBITDA at an impressive rate, but please don't ask Joseph Natale, best known for instituting Telus's long-term capital allocation policy, to give any details on what it will take to re-start Rogers' dividend growth. The truly sad part about Joe's response is that it's the same one that's been coming out of Rogers for over two years.

Christopher Allan Murray
AltaCorp Capital Inc., Research Division
Okay. And then I think that briefly on my question, which is around capital location; now that you've done the refinancing on the debentures and with the -- well, let's just assume of the sale of the Mining business gets closed by the end of the year or shortly thereafter. You look at your balance sheet, your -- you've talked about wanting financial capacity to participate in P3s, but it's not really been a capital-intensive business, really. So when you think about capital allocation, how should we be thinking about how you use your free cash flow? Do start thinking about M&A as a way of shaping the portfolio, and how does that thinking go into your divestitures? And to -- Or should we think about perhaps dividends, or do you even start looking at a share buyback?

David Smales
Executive VP & CFO
"...I think in terms of dividends and other methods of allocating capital, that's something we discuss with the board usually around the time we release our year-end results. And obviously, at that point, we'll know whether the Mining sale has happened or not. And that'll all be factored into our regular discussions around dividend policy and other things. So way too early to talk about that at this stage. And I think you asked about M&A, and Jean-Louis can comment as well, but I think he's already laid out, kind of, 2 immediate near-term focus areas, and we're at that right now."

DiH Comment - Being the CFO of a billion dollar company, I would think David has quite a bit of input regarding dividend policy. If Aecon's management let the Board set their dividend policy, that worries me.

AltaGas Ltd, Q3 2018 Earnings Call

Timothy William Watson
Executive VP & CFO
"Turning to our dividend, this has been an area of focus by the capital markets lately, given where the stock is yielding. We have determined, not surprisingly, that growing the dividend at this time is not appropriate. What we need to assess now in the mix of other factors is what constitutes a sustainable and ultimately growing dividend for the reshaped AltaGas."

Robert Michael Kwan
RBC Capital Markets, LLC, Research Division
"Got it. I guess turning to the dividend and on an appropriate payout ratio, I'm just wondering what are the different payout ratio metrics you're looking at. You did mention EPS earlier as well as cash flow. I'm just wondering, are you still looking at FFO, or would you also be looking at deductions from that number around your preferred dividend financing, minority interest distributions, maintenance CapEx, as well as rate-based investment into the units?"

David Wallace Cornhill
Founder, Chairman & Interim Co-CEO
"I think I'm going to jump into this one because I think you've got to look at everything. I think you can -- I prefer FFO because I find it a purer number than doing all the adjustments and normalizations. And I think earnings, whatever -- if they are true earnings and not adjusted with current -- some of the current GAAP normalized, are probably the best two.
I think it depends what you think is the appropriate range on those two metrics, but A FFO, U/A FFO are all factors that should be coming into your calculation on range at FFO. So we're quite aware of all those and what happens with changing mix and changing ability to fund dividend."

Benjamin Pham
BMO Capital Markets Equity Research
"I wanted to go over a bit about your comments around the transformation of your business the last 18 months and just some commentary on the dividend and where you thought it was going to go before and where it could go going forward. And so when you think about that business plan 18 months ago going into WGL, I know, David, you mentioned the financing -- or capital markets have effectively closed for AltaGas. But is there something else there that you may have misjudged along the way? Because it's -- the impact on your stock's been quite significant that -- is it really the financing market that's changed for you the last 18 months?"

David Wallace Cornhill
Founder, Chairman & Interim Co-CEO
"I think clearly if you look at where the financing market was almost two years ago now, when we were contemplating this transaction, to today it's quite different, primarily in terms of models and expectations on the market and access to equity. And we've been unable to really adapt over that period of time if we weren't locked up in a large regulatory process. And part of that was in bridge financing. It prevented us from doing some things we should have done -- from my perspective would have done earlier if we were free to do those things.
So we're playing catch up, quite frankly. If you look at -- go back to years ago, from a investment
thesis, people were looking for growth. People were supportive of growth. Today people want -- from a shareholder's perspective, are looking for totally self-funding and growth within that self-funding model, and which I think is prudent, quite frankly.
But that changed the dynamic dramatically. And if we look at our cost of capital, we see the cheapest cost of capital right now is asset sales."

DiH Comment -  Brief summary "Our stock is down, so our yield is too high, therefore we'll have to cut the dividend, in order to grow it back to the same level in the future. Of course, this is NOT our fault, it's the fault of the market."

Monday, July 9, 2018

2018 Mid Year Check In

After a week's vacation spent at a cottage in the lovely Lac-aux-Sables region of Quebec, it seems an appropriate time to provide an update on my 2018 financial goal:

Increase forward dividend income by $3000 while achieving a dollar-weighted average organic dividend growth rate of at least 5%.

Through the first six months of the year, I added about $1800 of forward dividend income and my dollar-weighted average organic dividend growth rate was 2.74%.

The forward dividend income amount is misleading for a couple of reasons. The forward dividend income amount is likely overstated by holdings of the Keg Income Fund and A&W Income Fund in both my RRSP and TFSA, given my plan to sell my duplicated holdings in my RRSP later this month so as to avoid any attention from the Canadian tax authorities. Since I plan to use the proceeds to invest in US traded stocks in my RRSP, the forward dividend income will be less given the current exchange rate (~0.76 CAD/USD). The forward dividend income is understated due to the excess amount of cash I'm holding in my unregistered account (saving to bring my Rogers or National Bank position there) and RRSP (no firm plans on what to add at the moment).

The dollar-weighted average organic dividend growth rate is harder to forecast accurately. Since I received 25 raises from my 38 portfolio companies (including three from Realty Income), I know the number of raises during the second half of the year will be less. Plus, there are a number of companies that I don't expect dividend increases from during 2018 (Alaris, Rogers, Riocan, etc.). On the other hand, I do expect some decent sized raises in the second half of the year (Enbridge, McDonalds, Emera, etc.)  and second raises from a couple of my Canadian holdings (Telus, Royal Bank, Bank of Nova Scotia, etc.). I'm also considering adding Algonquin Utilities to one of my accounts, which would boost my dividend growth rate.

Despite the mere five transactions during the first half of the year,my progress toward achieving my 2018 financial goal remains steady. Barring any huge dividend cuts or wholesale changes to my investment philosophy, I'm cautiously optimistic that I'll hit my target.

Friday, January 26, 2018

50 Companies of the Canadian Shareholder Yield Index

I recently finished the book Millennial Money by Patrick O'Shaughnessy who you might know from his Invest Like the Best podcast. Both Patrick and his father James are prominent proponents of factor investing (a.k.a. evidenced based investing), researching and writing extensively on the subject. One particular factor that is prevalent in the Millennial Money book is shareholder yield, a term I decided to explore further.

Although I previously thought that shareholder yield was the sum of dividend yield and buyback yield, I discovered through the S&P TSX Composite Shareholder Yield Index a debt paydown yield is also incorporated. Using the methodology provided by S&P, I tried to recalculate the three components of shareholder yield for the 50 companies that are equally weighted in the index. Based on my results (especially the negative values for the four companies at the bottom of the list), I likely made some mistakes in trying to replicate the calculation methodology set out by S&P. However, I still think the below table identifies some Canadian-listed companies whose management teams are capable capital allocators based on their ability to enhance shareholder value by paying dividends, buying back their shares and paying down debt.

Some of my preliminary observations from the above table are:

- Most of the dividend yields presented above are lower than the current dividend yields (i.e. H&R REIT, Corus Entertainment, Shaw Communications, etc.). This is due to my attempt to stick to the S&P methodology of dividing the total dividends paid over the last twelve months by the market capitalization of the company twelve months ago.
- For the 24 companies with a negative buyback yield, it means they issued more shares than they bought back over the past twelve months. I found it fascinating that almost half of the top shareholder yielders in Canada were net issuers of shares.
- Buyback yield is pretty controversial as management teams have a history of buying their shares back at high prices and subsequently putting an end to share repurchase programs when shares are trading cheaply. For buyback yield to useful on its own, you'd likely have to pair it with a valuation metric.
- Although I find it admirable that Valeant has successfully paid down so much of their debt, they still have about USD 30M of debt and remain a very highly leveraged company (debt/EBITDA ~ 7X).
- Initially, I was impressed with companies like Thomson Reuters that have positive percentages in each of the three factors contributing to shareholder yield. Although, the more I reflect, I wonder if it doesn't make sense for their management teams to focus on maximizing the factor with the highest return (i.e. Spin Master whose sole focus is debt reduction).
-  For shareholder yield to be a useful metric, you'd have to trend it over time. I noticed Suncor retired a nominal amount of shares over the past twelve months. However, they did a huge equity issue in the preceding twelve months that negates any positive buyback yield for a longer-term holder.

Does a high shareholder yield make you more or less likely to invest in a company?

Friday, January 19, 2018

Monthly Paying Canadian Dividend Growers for 2018

The list of Canadian companies that pay growing monthly dividends was one of my most read posts in 2017 and 2016. Using the Canadian Dividend All-Star list from December 31, 2017, I determined the list of monthly dividend growers for 2018.   To be included, companies had to pay a monthly dividend, increase their distribution at least once in the last 12 months, and have a minimum 5-year history of annually increasing their payouts.  The initial screen this year yielded 21 companies before I removed three organizations that had not raised their payout in the last 12-months (Exchange Income Corporation, Atrium Mortgage Investment Corporation and Pizza Pizza Royalty Corp). I also removed Boyd Group Income Fund due to their unimpressive 0.5% dividend yield. Although the 17 monthly dividend growers for 2018 fell from 20 last year, it still remains higher than the 12 companies in 2016.

The resulting 17 companies included six real estate investment trusts (REITs). As the payout ratios and valuations of REITs are usually calculated based on funds from operations (FFO) or adjusted funds from operations (AFFO), I decided to separate the resulting list in two so as not to confuse any casual readers. For your browsing pleasure, the resulting lists are included below.

Here are some quick comparisons between the monthly dividend payers and the complete list of Canadian Dividend All-Stars:

- 21 of the 101 Canadian Dividend All-Stars at December 31, 2017 pay dividends monthly.
- Although the average yield of all Canadian Dividend All-Stars of 3.13% is considerably less than the seventeen monthly payers listed above (5.25%), the 1-year average dividend growth rate of 9.07% is significantly greater than that of the monthly payers (5.12%). 
- The average 3, 5, and 10-year dividend growth rates of the Canadian Dividend All-Stars of 10.08%, 11.90% and 8.55% are much greater than the comparable growth rates of the monthly payers 6.08%, 6.26%, and 3.15%. 

As with any other screen, the above list is simply a starting point for further research.  Clearly, a deeper dive is required given the average EPS payout ratio of 292% and the high average trailing P/E of 47.3X valuation (partly due to nonsensical values for TransAlta Renewables). As indicated on my Investment Holdings tab, I currently own four monthly paying Canadian Dividend All-Stars (Granite REIT, Canadian Apartment Properties REIT, Enbridge Income Fund Holdings and Enercare Inc.). Of the remaining thirteen companies, I have owned Inter Pipeline in the past, and have included Altagas, First National and Cineplex on past watch lists. 

Do you hold or are you interested in purchasing any of the 20 monthly payers?

Friday, January 5, 2018

Q1 2018 Dividend Growth Watch List

Before I even had a chance yesterday to post my Q1 2018 watch list, I conducted my first transaction of 2018, adding to my Brookfield Infrastructure Partners position in my TFSA. Although I don't have any immediate plans to buy or sell shares, I still wanted to share my watch list. Since my investment holdings consists of my unregistered account, my TFSA, and RRSP, that will be the format in which I present my considerations.

Unregistered Account

This quarter, the theme of my watch list seems to be “utilities”. At current prices, I’m open to adding to my two utility holdings of Canadian Utilties (TSX: CU) and Emera (TSX: EMA). Both of these companies are reasonably priced, have attractive current dividend yields, and have a history of annually dividend increases (46 and 11 years respectively). For similar reasons, when I start to look at companies outside of my holdings, I gravitate towards Fortis (TSE: FTS) and Algonquin Power (TSX: AQN).  I’d consider initiating positions in these two companies since I feel both provide something slightly different than my current holdings. In the case of Fortis, it’s the extensive exposure to 11 states in the US. Exposure to the utility markets in New York, Illinois and Arizona are particularly attractive to me as I see these three states as having largely inelastic and growing demand for power. For Algonquin, it’s the company’s clean energy assets that I’d like to add to my portfolio. Additionally, the company offers investors the option to receive dividends in either US dollars or Canadian dollars, which I also find attractive.


I wrote the below paragraph before adding to my position in Brookfield Infrastructure Partners (TSX: BIP.UN) on January 4, 2018. 

My utilities theme extends to my plan to increase my holding of Brookfield Infrastructure Partners. Despite the nearly annual dilutive share offerings in order to finance their growing backlog, I continue to have faith in Brookfield’s excellent management team to effectively manage their utility, transport, energy, and communication infrastructure assets. The company’s recently announced $1.3B sale of an aging Chilean utility investment to a Chinese buyer might mean less or no dilution through share offerings in 2018. Exposure to a worldwide set of infrastructure assets that generate steady amounts of rising income continues to be desirable for me.


Although my plan is to let dividends accumulate and add them to my annual RRSP contribution in Q2 2018 to purchase more shares of Digital Realty Trust (NYSE: DLR), there’s one position I might add to in the next three months. With A&W Income Fund (TSE: AW.UN) announcing the addition of 35 net new restaurants to their royalty pool for 2018, it could be an opportune time to add to this position before increased royalties from the new restaurants flow through to A&W’s financial results.

Which companies appear at the top of your watch list for Q1 2018?