Tuesday, August 11, 2020

Picking 10 Companies to Hold for 10 Years - Part 2: Canadian Companies

Having establishing my criteria for picking companies to hold for the next 10 years, this post will explain how my five Canadian companies meet these criteria. Before progressing, I want to give credit and acknowledge the Dividend Growth Investing & Retirement website operator that compiles the monthly Canadian Dividend Growth All-Star list which I use extensively. I encourage you to sign up to receive this valuable resource each month. 

In case you haven't had a chance to look at the criteria entry, the six criteria I used to pick the five Canadian companies that I would hold for 10 years are:

1. Dividend Yield & Dividend Growth
2. Established Track Record
3. Reasonable Valuation
4. Diversification (across sectors and geographically)
5. Momentum
6. Current Ownership (or high on my watch list)

My five Canadian companies are:


The strength of Telus’ case to be included in a short-list of Canadian companies starts with their 5% yield, around 7% dividend growth last year, their commitment to growing their dividend growing forward, 16 years of consecutive dividend increases, and reasonable price at around 17X trailing earnings. Telus fails the momentum criterion (price is basically flat over the last year), and revenue is Canada dependent. Perhaps more than any other company on the Canadian list, Telus faces some regulatory risk as it relates to the Canadian Radio-television and Telecommunications Commission demands to lower their Internet prices, a key electoral promise for the governing Liberals in the last federal election. However, I feel this risk is partly offset by the dominant position that Telus holds as a telecommunications company in Western Canada.

Royal Bank:

I felt compelled to include one bank in my list of five companies that I would feel comfortable holding over the next decade, and decided on picking the largest bank in Canada by assets. Royal provides an attractive 4.7% yield, which it grew at around 8% last year (no expected dividend growth this year given covid-19), and is priced at a bargain 8X of trailing earnings. Although Royal has some operations outside of Canada, they are largely dependent on the Canadian economy, and their shares are down about 5% over the past year, showing poor momentum. Given how reliant Royal Bank is on the Canadian economy, a key risk is likely the tepid growth that Canada could experience as a result of the coronavirus pandemic.

Brookfield Infrastructure Partners (“BIP”):

As one of my largest holdings, I felt compelled to include BIP as it meets so many criteria. Solid starting yield 4.4% (with dividends being paid in USD), 12 consecutive years of dividend growth (~7% raise in January), a downright reasonable price of ~13X trailing FFO, and worldwide diversification through their four operating segments (utilities, transport, energy, data infrastructure). Momentum is modestly positive, with the stock up about 10% in the last year. The key risk I see with BIP is the complex corporate structure that might pit management priorities against those of unit holders. That said, I do think Bruce Flatt manages the larger Brookfield empire as well as any CEO in North America.


Granite REIT:

Although it’s not the best known REIT in Canada, Granite is worth including in a portfolio designed to prosper for a decade. Due to the strong momentum of it’s share price (up 25% over the last year), the initial yield isn’t super impressive at 3.7%, nor is their growth of distributions at 2.7% last year. However, Granite has an established track record of raising their distributions annually over the past 9 years, is still priced pretty reasonably at ~20X FFO, and has excellent geographical diversification with more properties in the US (34 at YE19) than Canada (26), along with some 31 properties in Europe. Although management has decreased the concentration on revenue further away from Magna, the key risk for Granite still relates to having about 40% of their revenue generated from one tenant that operates as a supplier to the cyclical auto industry.



In terms of criteria outlined yesterday, Fortis earns easy checkmarks on dividend yield (3.5%) and dividend growth (6% raise last year), established track records as shown with 46 years of consecutive increases, current ownership and has great geographical sales diversification for a Canadian company with about 56% of FY19 revenue generated in the U.S., and minor operations in the Caribbean. However, Fortis is a bit pricey at around 20X trailing earnings and the share price has basically been flat over the past year, failing to gain any momentum. Like any other utility operating across multiple jurisdictions, regulatory risk has the potential to materially impact business results.

Are there great Canadian companies that you think meet all the criteria and should have been included in the above five?

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