Although I have always felt obligated to report my monthly transactions here so as to hold myself accountable and clearly identify my investment holdings, I question the value add to my readers of reporting this information. Similarly, as helpful as I find it to have a watchlist heading a new month in order to focus my attention on a handful of companies, I wonder how my list of prospective companies is of any great importance to a reader. Therefore, in an effort to maximize my efficiency blogging, while halving the number of potentially useless entries for you to read, my experiment this month is to combine these two entries.
December Transactions
Buy #1 - Enercare Inc. (TSE: ECI)
After initiating a half-position in Enercare last month, I added more shares on the first of December that resulted in an "almost-full position" in my unregistered account. I was able to bring my average cost down on this Canadian company that is successfully integrating a US acquisition that should provide further stability to their cashflows gained from renting, servicing, and selling hot water tanks and air conditioning units. With a dividend yield over 5% and having grown their dividend by 10% early last summer, I remain open to adding more shares of this company as indicated below in my January 2017 watchlist.
Buy #2 - Life Storage Inc. (NYSE: LSI)
Although the selloff in US REITs that I anticipated after the federal reserve bank increased rates by 25 basis points never materially to the extent I hoped, I was able to add a couple more shares to my position in Life Storage at a 7% discount to my initial purchase price. With a P/FFO of approximately 19X, Life Storage is one of the more reasonably priced REITs in the self-storage space. The December 21st purchase completed my position in this company.
Donation - RioCan REIT (TSE: REI.UN)
Effective December 23rd, I made a donation of some of my RioCan shares to Food Banks Canada. By donating some shares of RioCan from my unregistered account, I accomplished four objectives:
1. Supported a worthy cause that I care deeply about.
2. Avoided paying a capital gain on shares on which I could not have accurately calculated my adjusted cost base due to shotty record keeping in my early investing days (the early 2000s).
3. Lowered my 2016 tax bill via a donation to a registered charity and my future tax bills due to the higher taxation of REIT distributions vs dividends.
4. Started to decrease my position in a company whose management seems more interested in empire building than acting in the best interest of their shareholders.
January 2017 Watchlist
I remain very open to adding to my investments in Enercare Inc. (TSE: ECI) and Emera Inc. (TSE: EMA) in my unregistered account. Some of the reasons I enjoy Enercare are outlined in my justification of my recent buy, and I will add that I would like to close my position in the company before pausing to consider if I would choose to go overweight. Emera is interesting to me since it provides additionally exposure to the utility sector at a fair P/E multiple of ~18X. Although I'm not crazy about their recent $300M+ secondary issue, I realize that they need to fund an aggressive capital investing schedule while keeping their targeted capital structure in place.
Part of my 2017 contribution to my tax-free savings account (TFSA) will be used to complete my position in Canadian Apartment Properties REIT (TSE: CAR.UN). Holding this REIT in my TFSA allows me to be a passive landlord in a growing portfolio of apartment rentals across Canada and collect monthly distributions tax-free equaling approximately 4% per year. Although I would like to add to my position in Toronto-Dominion Bank (TSE: TD) with another part of my 2017 TFSA contribution, I'm not crazy about paying a 52-week high price for this bank. I'll likely hold-off and wait for a chance to pick it up on a dip.
With the excess cash inside my RRSP, I would consider adding to my position in the Keg Royalties Income Fund (TSE: KEG.UN). Their three cent per share special dividend in December further demonstrates to me that unlike at RioCan, management of the Keg Royalties Income Fund takes their duty seriously to act in the best interest of the shareholders. Since I have yet to formally mention it in a watchlist, I am also interested in Brookfield Infrastructure Partners (TSE: BIP.UN) for possible investment in my TFSA or RRSP. I think the Brookfield empire is exceptionally well-managed, I would enjoy adding exposure in the infrastructure space for diversification purposes, and BIP tends to overachieve their dividend growth guidance of 8% per year. That said, I have a difficult time estimating a fair price for this company and find it frustrating that every time shares inch toward a 4% distribution yield, they inevitably bounce up 10% before I have sufficient conviction to act. BIP could very well end up in my "too complicated" pile of discarded opportunities.
My investment holdings page has been updated to reflect my three December transactions and I will keep it updated until my next transaction/watchlist entry. Since this will likely be my last post for 2016, I wanted to wish everyone a restful holiday season and a prosperous 2017!
What stocks are you considering heading into 2017???
Tuesday, December 27, 2016
Monday, December 19, 2016
44 Years of Dividend Growth - Canadian Utilities Limited
Since I have been struggling to find ideas for posts lately, I decided to dig deeper on individual companies on the Canadian Dividend All-Star list, the best source to identify quality Canadian companies with at least a five year history of growing their dividends. Since most dividend bloggers overwhelm me with their financial analysis, my plan is to take it light on the numbers while focusing on the qualitative factors that might make the company an attractive or unattractive addition to your investment portfolio. Being a logical thinker, I will start at the top of the Canadian Dividend All-Star list, with Canadian Utilities Limited, the owner of the longest annual streak of dividend raises at 44 years.
Company Overview
A subsidiary of ATCO Ltd., Canadian Utilities' operations consist of their electricity segment (~55% of total revenues) and their pipelines and liquids segment (~45% of total revenue). Both segments include regulated and non-regulated businesses. Although the company's assets and operations are mostly centered in the Canadian province of Alberta, there is growing geographical diversification with investments in Australia and Mexico internationally, and Yukon, the Northwest Territories, and Saskatchewan in Canada.
Dividends
After announcing a 10.2% dividend increase in October 2016, the company's dividend yield is currently ~3.5%. The earnings payout ratio is high at 87% of the trailing 12 months EPS. The 3, 5, and 10 year dividend growth rates are impressive at 10.1%, 9.3%, and 7.9% respectively.
Valuation
A recent rally in Canadian Utilities' share price has lead to a trailing P/E of 24X. This value is relatively high given the stock has traded in the 18-22X range for most of the past 5 years. Looking at EV/EBITA leads to a similar conclusion, with the company currently trading at 13.5X in contrast with their 5-year average in the 9-12X range.
Qualitative Catalysts
There are some obvious reasons why you would consider adding Canadian Utilities to your investment portfolio
1. Stable Cashflows from Regulated Businesses
- Reviewing the last 5-years of Canadian Utilities financial statements shows that the company benefits from the regulated nature of some of their business segments. There are no wild swings in revenue or profitability that tends to keep investors awake at nights.
2. The Dividend Streak
- As a dividend investor, you should seek out companies with management who is not only committed to sharing their profits with you, but who realize the importance of raising their payouts over time in-line with business results. With the longest annual streak of dividend increases of any Canadian company, the pressure is on Canadian Utilities' management to keep the streak alive.
3. Capital Investments to Grow Earnings
- Canadian Utilities plans to invest $1.5B in growth projects in 2016, $2.8B in 2017, and $1.8B in 2018. Given the company's net profit margin of 11% and ROA of 3% in 2015, the success of these capital projects should enable management to continue to deliver higher dividends to their shareholders.
Qualitative Drawbacks
Beyond the fact that the current valuation of the company's shares seems steep, and that the payout ratio is high even for a utility company, there are some additional drawbacks for investors to consider before adding Canadian Utilities to their investment portfolio.
1. Financing Needed for CAPEX
- With Canadian Utilities aggressive capital expenditure program over the next 3 years, the company will need to continue to access the debt and capital markets. This financing will result in higher leverage and shareholder dilution. In order to fund their $1.5B of CAPEX in 2015, the company issued $650M of additional debt, issued preferred shares of $375M, and used some of their of CFO to make up the difference.
2. High Exposure to Alberta Economy / Oil Prices
- Although I couldn't find exactly how much of the company's revenues and earnings relate to Alberta, I feel very comfortable indicating that the company's results are heavily dependent on the strength of the Alberta economy. Given Alberta's economy tends to move in sequence with the price of oil, it's not a stretch to speak of the high correlation between Canadian Utilities' results and the price of oil.
3. Regulatory Risk
- Being involved in regulated businesses entails the risk that future regulatory decisions outside of the company's control could materially impact Canadian Utilities' operations and results. For instance, the Alberta government would be politically ignorant to allow the company to increase their electricity rates by double digits during a difficult period in the province. At the federal level, as the Canadian government pushes programs to decrease carbon emissions, Canadian Utilities will need to adapt in order to remain compliant and relevant.
Conclusions
Most Canadian dividend growth investors have at least one utility in their investment portfolio. Although it might be tempting to include Canadian Utilities in your portfolio due to their 44 year streak of raising their dividend and the recent 10.2% dividend increase, I would caution that there will likely be a better time to add the company to your holdings. Given the relatively high current valuation, 87% payout ratio, and aggressive capital program over the next 3 years, there are better candidates to buy at the moment.
What would make you consider adding shares of Canadian Utilities to your portfolio?
Company Overview
A subsidiary of ATCO Ltd., Canadian Utilities' operations consist of their electricity segment (~55% of total revenues) and their pipelines and liquids segment (~45% of total revenue). Both segments include regulated and non-regulated businesses. Although the company's assets and operations are mostly centered in the Canadian province of Alberta, there is growing geographical diversification with investments in Australia and Mexico internationally, and Yukon, the Northwest Territories, and Saskatchewan in Canada.
Dividends
After announcing a 10.2% dividend increase in October 2016, the company's dividend yield is currently ~3.5%. The earnings payout ratio is high at 87% of the trailing 12 months EPS. The 3, 5, and 10 year dividend growth rates are impressive at 10.1%, 9.3%, and 7.9% respectively.
Valuation
A recent rally in Canadian Utilities' share price has lead to a trailing P/E of 24X. This value is relatively high given the stock has traded in the 18-22X range for most of the past 5 years. Looking at EV/EBITA leads to a similar conclusion, with the company currently trading at 13.5X in contrast with their 5-year average in the 9-12X range.
Qualitative Catalysts
There are some obvious reasons why you would consider adding Canadian Utilities to your investment portfolio
1. Stable Cashflows from Regulated Businesses
- Reviewing the last 5-years of Canadian Utilities financial statements shows that the company benefits from the regulated nature of some of their business segments. There are no wild swings in revenue or profitability that tends to keep investors awake at nights.
2. The Dividend Streak
- As a dividend investor, you should seek out companies with management who is not only committed to sharing their profits with you, but who realize the importance of raising their payouts over time in-line with business results. With the longest annual streak of dividend increases of any Canadian company, the pressure is on Canadian Utilities' management to keep the streak alive.
3. Capital Investments to Grow Earnings
- Canadian Utilities plans to invest $1.5B in growth projects in 2016, $2.8B in 2017, and $1.8B in 2018. Given the company's net profit margin of 11% and ROA of 3% in 2015, the success of these capital projects should enable management to continue to deliver higher dividends to their shareholders.
Qualitative Drawbacks
Beyond the fact that the current valuation of the company's shares seems steep, and that the payout ratio is high even for a utility company, there are some additional drawbacks for investors to consider before adding Canadian Utilities to their investment portfolio.
1. Financing Needed for CAPEX
- With Canadian Utilities aggressive capital expenditure program over the next 3 years, the company will need to continue to access the debt and capital markets. This financing will result in higher leverage and shareholder dilution. In order to fund their $1.5B of CAPEX in 2015, the company issued $650M of additional debt, issued preferred shares of $375M, and used some of their of CFO to make up the difference.
2. High Exposure to Alberta Economy / Oil Prices
- Although I couldn't find exactly how much of the company's revenues and earnings relate to Alberta, I feel very comfortable indicating that the company's results are heavily dependent on the strength of the Alberta economy. Given Alberta's economy tends to move in sequence with the price of oil, it's not a stretch to speak of the high correlation between Canadian Utilities' results and the price of oil.
3. Regulatory Risk
- Being involved in regulated businesses entails the risk that future regulatory decisions outside of the company's control could materially impact Canadian Utilities' operations and results. For instance, the Alberta government would be politically ignorant to allow the company to increase their electricity rates by double digits during a difficult period in the province. At the federal level, as the Canadian government pushes programs to decrease carbon emissions, Canadian Utilities will need to adapt in order to remain compliant and relevant.
Conclusions
Most Canadian dividend growth investors have at least one utility in their investment portfolio. Although it might be tempting to include Canadian Utilities in your portfolio due to their 44 year streak of raising their dividend and the recent 10.2% dividend increase, I would caution that there will likely be a better time to add the company to your holdings. Given the relatively high current valuation, 87% payout ratio, and aggressive capital program over the next 3 years, there are better candidates to buy at the moment.
What would make you consider adding shares of Canadian Utilities to your portfolio?
Monday, December 12, 2016
Goals for 2016 - Year End Assessment
"A goal without a plan is just a wish"
- Antoine de Saint-Exupery
Back on January 25th of this year, I shared my 2016 goals. Although there are a couple weeks left in 2016, I'm comfortable performing my year end assessment now as I'm trying to gear down heading into the holiday season. My goals fell into the three broad categories outlined below and contained the bullet point tactical plans which would allow me to measure my progress. My self-assessment is included in italics and expanded on via the three paragraphs.
Increase Passive Income by 25% => Fail*
- Make regular contributions to my investment accounts representing approximately 50% of my take-home pay => 100% achieved
- Maximize my investments in tax preferred accounts (i.e. RRSP, TFSA, RESP) => 100% achieved
- Achieve a weighted average dividend growth for my total portfolio of 5% => Sitting at 5.13% with 3 increases (ENB, ENF, PFE) expected by year end
- Avoid dividend cuts => Achieved with 14 business days left this year *knock on wood* I feel like the below plan helped me avoid dividend cuts.
- Do NOT add to any holdings that have not raised their dividend in the past 12-months => Proud to have stuck to this plan
- Add an additional source of passive income beyond dividend stocks => Failed miserably
- Limit short-term trades to a maximum of one per month => Only 7 short-term trades so far this year!
- Make regular contributions to my investment accounts representing approximately 50% of my take-home pay => 100% achieved
- Maximize my investments in tax preferred accounts (i.e. RRSP, TFSA, RESP) => 100% achieved
- Achieve a weighted average dividend growth for my total portfolio of 5% => Sitting at 5.13% with 3 increases (ENB, ENF, PFE) expected by year end
- Avoid dividend cuts => Achieved with 14 business days left this year *knock on wood* I feel like the below plan helped me avoid dividend cuts.
- Do NOT add to any holdings that have not raised their dividend in the past 12-months => Proud to have stuck to this plan
- Add an additional source of passive income beyond dividend stocks => Failed miserably
- Limit short-term trades to a maximum of one per month => Only 7 short-term trades so far this year!
* Currently sitting at higher forward expected dividend income of ~17% and don't expect to reach 25% (or even 20%) by year-end. Two big reasons for this are that my largest holding (Alaris Royalty) did not raise their dividend in 2016, and the fact that I added a bunch of US stock holdings in my RRSP and only count the dividend income at a 1:1 USD to CAD ratio. Still very proud of raising my expected dividend income by ~17% and realize how hard it will be to see large raises in the future as the figures grow at a much quicker pace than my income/portfolio contributions.
Understand Where My Money is Being Spent => Pass*
- Track large variable expenses such as costs associated with my car, gifts, work, taxes, sports, cottage, and anything appearing on my personal credit card => Probably overdid this via a detailed spreadsheet
- Save at least $1000 this year on variable expenses => Achieved ($240 haircuts, $325 snow removal expense, $50 banking fees, $80 faucet installation, $400 gifts)
- Continue to make investments that decrease expenses over time (i.e. tools for changing the tires of our cars, hair cutting equipment, etc.) => Achieved (mainly due to swapping air conditioner for thermo pump that is saving large amounts of natural gas consumption)
- In-line with the above goal, get the roof of my cottage repaired => Epic fail
Understand Where My Money is Being Spent => Pass*
- Track large variable expenses such as costs associated with my car, gifts, work, taxes, sports, cottage, and anything appearing on my personal credit card => Probably overdid this via a detailed spreadsheet
- Save at least $1000 this year on variable expenses => Achieved ($240 haircuts, $325 snow removal expense, $50 banking fees, $80 faucet installation, $400 gifts)
- Continue to make investments that decrease expenses over time (i.e. tools for changing the tires of our cars, hair cutting equipment, etc.) => Achieved (mainly due to swapping air conditioner for thermo pump that is saving large amounts of natural gas consumption)
- In-line with the above goal, get the roof of my cottage repaired => Epic fail
* Very proud of my detailed expense tracking spreadsheet, although I'm unlikely to keep similar records in 2017. Planning on learning how to change my oil/filters in our cars in 2017, and finally getting the cottage roof repaired (or doing it myself).
Personal Improvement => Fail*
- Visit a dentist, optometrist, and doctor this year; although this might seem like a very basic goal, it has been 10+ years, 2 years, and 5+ years respectively since I have visited these professionals => 2/3 (dentist and optometrist)
- Write at least 52 blog entries this year while focusing on quality (i.e. no filler entries) => This is entry 46 and its unlikely I have 6 more quality entries in me this year.
- Complete at least five workouts every week => Fail, although I'm doing decent averaging 10,000 steps a day over the last month.
- Run a 5km, 10km, and half-marathon in 2016 => Fail again. Decided I'd keep running fun instead of pushing myself to race.
- Take my wife on at least one weekend getaway => Finally a pass! Spent a nice weekend in Kingston last spring :)
- Be mentally present and focused when spending time with my son => Of all my misses this year, this one makes me the saddest. Can't honestly say I'm mentally present and focused 100% of the time :(
- Continue money/personal improvement experiments (i.e. developing a new skill in 20 hours) => Semi-pass due to my efforts to make people's days better if it can be accomplished by spending $20 or less.
- Identify three areas/jobs at my company that interest me and talk to employees in these areas => Had two interviews in different areas of my company, and did talk to someone about a third area...unintentional pass!
- Complete at least one personal development course relating to my profession => Semi-pass: Passed my oral French exam, which doesn't relate to my profession, but does set me up nicely for future opportunities
- Make meaningful donations of time, money, and stock to causes that I feel passionate about => Made meaning money and stock donations. Did volunteer at a youth ultimate clinic...does that count?
Personal Improvement => Fail*
- Visit a dentist, optometrist, and doctor this year; although this might seem like a very basic goal, it has been 10+ years, 2 years, and 5+ years respectively since I have visited these professionals => 2/3 (dentist and optometrist)
- Write at least 52 blog entries this year while focusing on quality (i.e. no filler entries) => This is entry 46 and its unlikely I have 6 more quality entries in me this year.
- Complete at least five workouts every week => Fail, although I'm doing decent averaging 10,000 steps a day over the last month.
- Run a 5km, 10km, and half-marathon in 2016 => Fail again. Decided I'd keep running fun instead of pushing myself to race.
- Take my wife on at least one weekend getaway => Finally a pass! Spent a nice weekend in Kingston last spring :)
- Be mentally present and focused when spending time with my son => Of all my misses this year, this one makes me the saddest. Can't honestly say I'm mentally present and focused 100% of the time :(
- Continue money/personal improvement experiments (i.e. developing a new skill in 20 hours) => Semi-pass due to my efforts to make people's days better if it can be accomplished by spending $20 or less.
- Identify three areas/jobs at my company that interest me and talk to employees in these areas => Had two interviews in different areas of my company, and did talk to someone about a third area...unintentional pass!
- Complete at least one personal development course relating to my profession => Semi-pass: Passed my oral French exam, which doesn't relate to my profession, but does set me up nicely for future opportunities
- Make meaningful donations of time, money, and stock to causes that I feel passionate about => Made meaning money and stock donations. Did volunteer at a youth ultimate clinic...does that count?
* Felt like I was all over the map on "personal improvement" in 2016 without any specific focus or conviction. I either have to break this up into more than one area, or cut down the number of things I try to achieve in 2017.
Unlike in 2015, where I attained all my financial and non-financial goals, success was harder to come by this year. As alluded to above, I feel like focusing on several key areas instead of a bunch of unrelated, not terribly important initiatives will be key in 2017. I have some ideas of what I'd like to accomplish with my investing in 2017, but need to narrow down what else to focus on.
Unlike in 2015, where I attained all my financial and non-financial goals, success was harder to come by this year. As alluded to above, I feel like focusing on several key areas instead of a bunch of unrelated, not terribly important initiatives will be key in 2017. I have some ideas of what I'd like to accomplish with my investing in 2017, but need to narrow down what else to focus on.
Did you achieve your financial and non-financial goals in 2016? If it's too early to conclude, how are you tracking against your objectives?
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