September 2016 Dividend Growth Stock Considerations

After initiating positions in Iron Mountain and Canadian Apartment Properties REIT in early August, the latter half of the month was pretty quiet as I collected dividends and received two raises from Royal Bank and Bank of Nova Scotia. During those quiet times, I thought about which companies to target in September.

Canadian Companies: 

After appearing on my August watch list and my Ten Canadian Restaurants With Growing Dividends post, four Canadian restaurants remain very interesting to me. The combination of distribution yield, distribution growth, modest price-to-earnings multiples, and same-store-sales growth at the Keg (TSE: KEG.UN), A&W (TSE: AW.UN), Pizza Pizza (TSE: PZA), and Boston Pizza (TSE: BPF.UN) are all drawing me toward investment. Even as their share prices climb toward 52-week highs, I'm considering buying a sampling of the Keg, Boston Pizza and A&W in my RRSP using some of the proceeds from my planned sale of Royal Bank (which I have been overweight for the last six months). Given that the distribution from Pizza Pizza qualifies as an eligible dividend for tax purposes, I would likely buy shares of that company in my unregistered account.

Beyond the four restaurants mentioned above, I find very few Canadian companies that interest me at their current prices. I took a deeper look at Algonquin Power & Utilities Corp (TSE: AQN) as the near 5% yield and 10% dividend growth over the past year was impressive. Equally as important, AQN would add a new sector to further diversify my portfolio. My hesitation comes from the company's high P/E multiple (~28X) and my inability to breakout their growth from maintenance CAPEX in order to determine if their payout is sustainable. I have also considered adding to some of my current holdings in my unregistered portfolio, namely Enbridge Income Fund (TSE: ENF) and Bell Canada (TSE: BCE). Lastly, after a high-level review of the Brookfield group of companies (I will share more in a future post), Brookfield Infrastructure Partners (TSE: BIP.UN) is the most interesting subsidiary. Investing in a company involved in global infrastructure projects is part of my long-term portfolio building plan.

United States Companies: 

After establishing an almost full position in Iron Mountain (NYSE: IRM) in August, I would consider closing out my position in September on share price weakness combined with prolonged strength in the Canadian dollar vs the USD.  The 4.7% dividend yield, guidance indicating double digit annual dividend growth in 2017 & 2018 with 4% growth thereafter, and reasonable price to estimated 2016 FFO =~ 16X have prompted me to consider adding to this planned long-term holding. The other US REIT I would consider adding to my RRSP in order to further provide further sector diversification is Life Storage Inc (NYSE: LSI) which was formerly Sovran Self Storage. Main reasons for this consideration are the lowest price to FFO multiple in the self-storage segment, 4% yield, and strong distribution growth.

Instead of asking which stocks interesting you heading into September 2016, I'm particularly curious if there are any Canadian dividend growth stocks you are looking at closely given their current prices? Thanks in advance for sharing your ideas.

3 Recent Buys - Alaris, Iron Mountain and Canadian Apartment Properties REIT

As an investor with a very long-term time horizon, I love it when a company I am interested in posts underwhelming quarterly results that fail to meet analyst expectations. At times like these, when the pessimism of short-term traders and speculators leads to deep discounts on the share prices of great companies, I cannot help but gorge myself on stock. My primary challenge when I see shares trading 5-25% lower after an earnings miss is determining to what degree the short-term headwinds the company faced might impact their long-term business results. 

One of the greatest advantages I have as an individual investor is my ability to leverage my long-term time horizon in order to take advantage of opportunities of temporary weakness in individual companies. A second key advantage is that I can be very overweight in a company without having to answer to investors, a Board, or shareholders if I think the situation represents a unique opportunity. With that perspective, I present my three most recent buy transactions.

1. Alaris Royalty (TSE: AD)

If you have five minutes, take a peak at Alaris's Q2 earnings news release and ask yourself if any item(s) merit a 20% drop in share price. Yes, there is some bad news relating to KMH, Limited Partnership, but KMH is only one of Alaris's 17 partners, and not even a material one. Instead, the numbers that jump out at me are 23% revenue growth, 7% dividend growth, and 6% CFO growth.   My plan to hold my Alaris position in my taxable account instead of my RRSP came to fruition at a much cheaper price than I expected to pay.

2. Iron Mountain (NYSE: IRM)

Since you had five minutes to take a look through Alaris's Q2 earnings, you might have another five to browse Iron Mountain's Q2 results. If you do not feel like taking the time, I can summarize quickly: margin pressure from the Recall acquisition causes an earnings miss. Taking advantage of a 5%+ dip in share prices, I made two purchases in order to diversify my REIT holdings to include a sector I could not invest in through Canadian shares. This shareholder friendly company provides me with global diversification and a starting yield of over 5%. 

3. Canadian Apartment Properties REIT (TSE: CAR.UN)

My plan to diversify my REIT holdings got another boost when Canadian Apartment Properties REIT ("CAR") reported Q2 results that missed analyst expectations. Regardless of what analysts expected, operating revenues up over 12%, a 98% occupancy rate, and a 60% net operating margin totally meet my expectations of a great company. Having lived in a CAR building a number of years ago, I have favorable impressions of management and love the cross-Canada geographic diversification of their properties. Re-establishing a position at a 4% distribution yield due to a 5% decline in share price felt like a no-brainer to me.

 I am extremely happy with all three of my recent buys and look forward to capitalizing on similar opportunities in the future. 

What was your most recent buy and what induced you to pull the trigger?

4 Canadian Renewable Energy Companies With Growing Dividends

Motivation for my blog entries can come from unlikely sources. In early May, I received a LinkedIn message from a recruiter at Brookfield Renewables asking if I was interested in a position with their firm. I enjoy my current employer, and have no intention of leaving in the short-term, but it was still very flattering to receive the offer. I also remembered reading about one of my local fellow dividend bloggers having a position in Brookfield Renewables, and decided to dig a bit deeper into the company. Being open to diversifying my holdings into other sectors, I expanded my search parameters to include the renewables sector in Canada, looking to see if other companies in the sector had a dividend growth record.

My research into the renewables sector lead me to the S&P/TSX Renewable Energy and Clean Technology Index that includes 19 companies. Seeing some of the names in the index, I became curious about the criteria to be included as I came recognized a bus manufacturer (New Flyer Industries) and packaging company (Cascades Inc). Turns out the criteria to be included in the index are pretty loose, allowing companies that focus on "reducing or eliminating the negative ecological impacts of their operations, while at the same time improving the productive and responsible use of natural resources". These broad criteria create a big enough gap to drive a New Flyer bus through.

To narrow down the search parameters, I screened the list of 19 constituents for positive 1-year dividend growth and market capitalization in excess of CAD 1 billion. The resulting four matches are included on the summary screen below.



What jumped out at me was that there were no clear bargains with trailing P/E ratios ranging from 19X to 6835X. The relatively cheap TransAlta Renewables has the highest dividend yield (6.2%) and the only free cash flow payout ratio under 100%. My would-be suitor Brookfield Renewables has a nice combination of current yield (5.7%) and 1-year distribution growth (7.2%), but is still in the expansion phase leading to their 135% payout ratio and 400X+ trailing P/E multiple. The negative FCF and awe-inducing P/E multiple are enough to turn me off of Innergex Renewable at this time. Algonquin Power is becoming more interesting to me as I did not realize how much of their business related to renewable energy. Algonquin's relatively high distribution growth rate (10%) and payout ratio just north of 100% make me want to wait for a better entry point than a trailing P/E of 30X.

Although none of the four Canadian renewable energy companies profiled above could currently be considered cheap, they all warrant further consideration for inclusion in a diversified portfolio of investments. Here's hoping the S&P/TSX Renewable Energy and Clean Technology Index continues to expand as our continent shifts away from non-renewable energy sources.

Do you own shares in any companies in the renewables sector? 

August 2016 Dividend Growth Stock Considerations

After experimenting with the format of my June watch list, and skipping a July list altogether due to my vacation and lack of oustanding opportunities, below are some stocks I am considering for purchase in August.

Canadian Companies: Four Restaurants & Two REITs

As I indicated in my post Ten Canadian Restaurants With Growing Dividends, there are a number of Canadian restaurants that I am interested in. In particular, the combination of distribution yield, distribution growth, modest price-to-earnings multiples, and same-store-sales growth at the Keg (TSE: KEG.UN), A&W (TSE: AW.UN), Pizza Pizza (TSE: PZA), and Boston Pizza (TSE: BPF.UN) are all drawing me toward investment. The main thing holding me back from purchasing units in any of the four restaurants is the strong price appreciation since I posted that entry in May. Despite the share price appreciation, I will likely add shares in the Keg or A&W in my TFSA. As unscientific as it might sound, I enjoy the food and dining experience at Keg & A&W far more than that at Pizza Pizza and Boston Pizza, and will feel more comfortable being a shareholder in businesses that I patronize.

After adding shares in Granite REIT earlier this year, there are two other REITs that interest me which were covered in my post Canadian REITs With Growing Distributions. Since I plan to write more on the Brookfield group of companies later this month, I will simply note that Brookfield Canada Office Properties (TSE: BOX.UN) offers a good combination of current yield (~4.5%) and growth (~5.7% over the past year) at a reasonable Price/FFO multiple. Despite having a lower current yield (~3.9%) and distribution growth rate (~3.3%), I am still attracted to Canadian Apartment Properties REIT (TSE: CAR.UN) due to exposure to the rental market in large Canadian cities. For those of my readers south of the Canada/US border, home prices in many large Canadian cities (Toronto and Vancouver being the most obvious examples) have entered what I consider to be the bubble zone. Even in Ottawa, among my younger professional colleagues, many are currently renting while they wait for house prices to correct downwards. As the housing bubble continues to inflate, CAR.UN stands to benefit from rent increases and growth opportunities to provide affordable rental housing.

United States Companies: A Hold-Over from June and An Old Friend

One of my plans within my RRSP is to create a basket of US REITs covering industries that I cannot invest in through the Canadian markets. Iron Mountain (NYSE: IRM) offers storage and information management services to companies worldwide. Although I am usually reluctant to buying a stock trading near its 52-week high ($41.50), there is a lot to like about this unique company. The 4.7% dividend yield, guidance indicating double digit annual dividend growth in 2017 & 2018 with 4% growth thereafter, Price to estimated 2016 FFO =~ 17X, Price to estimated 2016 AFFO =~ 15X, and a recently upgraded BB-/Stable credit rating from S&P all help provide me comfort initializing a position. Now if only the Canadian Dollar could pick up a little steam against its US Dollar counterpart.

I was pleasantly surprised last month when Omega Heathcare Investors (NYSE: OHI) announced a two cent distribution increase instead of their normal one cent distribution raise they provided each quarter over the last three years. Although I have a full position in Omega within my RRSP, I continue to find the yield (~7%) and relatively low P/FFO (~13X) tempting. Although I would likely not add much to my current position, I could definitely justify nibbling a bit more on Omega.

Which stocks interest you heading into August 2016?