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."