“You have a pair of pants. In the left pocket, you have $100. You take $1 out of the left pocket and put in the right pocket. You now have $101. There is no diminution of dollars in your left pocket. That is one magic pair of pants.”

Month: July 2021

Exchange Rate Hampers Fortis’ Q2 Results

Posted by JM on July 29, 2021 

Here is an excerpt from Fortis Inc.’s (FTS) recent quarterly earnings release July 29, 2021.

Earnings Report:

Q2 2021 Estimate: 0.59
Q2 2021 Actual: 0.55
Q3 2021 Estimate: 0.67

07:20 AM EDT, 07/29/2021 (MT Newswires) — Fortis Inc. (FTS.TO) edged down in U.S. premarket trading as it reported second-quarter adjusted basic EPS of C$0.55, down from C$0.56 in the year-ago period and missing the S&P Capital IQ consensus estimate for normalized EPS of C$0.59.

The electric and gas utility company recorded adjusted net earnings of C$259 million, compared with C$258 million in the second quarter of 2020. The company attributed the change to adjusted net earnings and EPS to strong operating growth, partially offset by negative foreign exchange impacts.

As-reported net earnings came in at C$253 million or C$0.54 per share, a decrease of C$21 million or C$0.05 per share in the same period a year ago, mainly due to a lower U.S.-to-Canadian dollar exchange rate and the lack of significant one-off items unlike the prior-year period.

Excluding the impact of foreign exchange and one-off items, net earnings rose by C$17 million or C$0.04 per share year over year, the company said.

Net earnings for the first half of 2021 reached C$608 million or C$1.30 per share, up from C$586 million or C$1.26 per share in the year-ago period.

Fortis said its long-term outlook remains unchanged and that lingering uncertainty due to the COVID-19 pandemic is not expected to have a material financial impact on the company in 2021.

Fortis also released an update to its sustainability efforts, saying it achieved a 15% annual reduction in Scope 1 emissions in 2020, equivalent to taking 400,000 vehicles off the road in a year.

The company also said its unit Tucson Electric Power now has approximately 1,000 megawatts of renewable energy on its system and can produce more than 25% of its energy from renewable sources.

Source: MT Newswires

Fortis Inc. (FTS) was one of our first purchases back in 2012 in our Canadian Magic Pants Portfolio. Fortis has increased its dividend every year for over four decades now, so it is one of the highest quality stocks we own. My mentor, Tom Connolly, has a word for stocks that perform like Fortis; ‘bondified’. After a decade or two, maybe sooner, stocks like Fortis offer an attractive alternative to fixed income instruments such as government bonds and can be counted as the fixed income portion of your portfolio. 

Another thing I like about Fortis is that management regularly communicates and delivers on its dividend growth guidance. Here is an excerpt from their most recent ‘Second Quarter 2021 Results’ document found on their website.

“Fortis expects long-term growth in rate base will support earnings growth and the annual dividend growth guidance of approximately 6% through 2025.”

Knowing that the dividend will grow over the next few years and by how much is comforting as an income investor and a show of confidence by management on where they feel the business is headed. Fortis is one of our quality dividend growers where historically, dividend growth and price growth have moved hand in hand.

As the dividend grows so does the price!

TFI International Acquisition Pays Off

Posted by JM on July 26, 2021 

Here is an excerpt from TFI International’s (TFII) recent quarterly earnings release July 26, 2021.

Earnings Report:

Q2 2021 Estimate: 0.96
Q2 2021 Actual: 1.44
Q3 2021 Estimate: 1.10

TFI International (TFII.TO) edged up in after-hours New York trading after the company on Monday said its second-quarter profit rose five-fold as revenue more than doubled following its acquisition of United Parcel Service’s (UPS) freight business, and topped analysts’ estimates for the measure by half.

Revenue rose to US$1.65 billion from US$740.1 million.

The gains follow on TFI’s US$800-million acquisition of the UPS Freight, truckload and less than truckload business at the end of April.

“The second quarter was historically significant for TFI International, with the closing of our UPS Freight acquisition and record performance across the board. With all four of our business segments reaching new heights, it is increasingly clear that our strategy to navigate the unprecedented events of the past year has created a platform for growth and profitability that is the strongest in our company’s history,” chief executive Alain Bedard said in a release.

TFI did not update its guidance in the release.

Source: MT Newswires

TFI International (TFII) first came across our radar a few years ago while I was still working in the tech services sector. They were acquiring trucking companies we supported and integrating them quickly onto their platform. Although we ended up losing a few customers because of them I was impressed at how quickly they acquired and integrated new acquisitions. Last year TFII reached the milestone of ten consecutive years of paying a growing dividend, so I decided to dig a little deeper into the fundamentals. Double digit annual earnings growth since 2011 and a Total Annual Return of 18.3% quickly caught my attention. I was shocked to discover that the company was also reasonably priced in the range of its historical P/E. Always looking for the next good Canadian dividend grower that is sensibly priced for our portfolios, I bought a starting position in September 2020. Today TFII is up significantly from our purchase price a year ago and still growing earnings and acquiring companies.

CNR Earnings Stay on Track

Posted by JM on July 20, 2021 

Here is an excerpt from Canadian National Railway’s (CNR) recent quarterly earnings release July 20, 2021.

Earnings Report:

Q2 2021 Estimate: 1.50
Q2 2021 Actual: 1.49
Q3 2021 Estimate: 1.56

Canadian National Railway (CNR.TO) on Tuesday said its second-quarter profit rose 90% on higher revenue and lower costs, as it offered little additional detail on its US$33.6-billion offer for the Kansas City Southern Railroad (KSU).

The railway said it earned C$1.03 billion, or C$1.46 per share, in the period, up from C$545 million, or C$0.77, in the second quarter of 2020, which included a C$486 million charge. Adjusted profit, which excludes most one-time items, rose 17% to C$1.06 billion, or C$1.49, just topping the average analyst estimate for the measure of C$1.48 per share, according to Capital IQ.

Revenue rose 12% to C$3.6 billion, while the company’s operating ratio, an efficiency measure where lower is better, dropped to 61.6% from 75.5%, or 61.6% from 60.4% on an adjusted basis.

The company said the rise in its profit came as freight volumes continue to improve from pandemic lows, as revenue-traffic miles rose by 13%.

Canadian National did not offer any additional detail on offer for Kansas City Southern Railroad, which is awaiting regulatory approval from the U.S. Surface Transportation Board. The offer topped a bid from rival Canadian Pacific Railway (CP.TO).

“We enter the second half of 2021 focused on executing for our customers and leveraging our strong network performance to safely and sustainably drive long-term value creation for all of our stakeholders. Our proposed combination with Kansas City Southern has received overwhelming support from a broad base of stakeholders because it will enhance competition and drive economic growth in North America. We are confident in our ability to obtain the necessary approvals and successfully close this pro-competitive combination,” chief executive J.J. Ruest said in a release.

The railway also reiterated 2021 guidance for double-digit growth in its earnings per shares.

Canadian National shares closed up C$0.54 to C$129.79 on the Toronto Stock Exchange.

Source: MT Newswires

CNR is as good as it gets when it comes to quality dividend growers in Canada. With a dividend growth streak of 25 years, Value Line Safety Rating of 1, Value Line Financial Rating of ‘A’ and a S&P Rating of    ‘A ‘, only the largest Canadian Banks are rated higher. The trouble with CNR is purchasing it at a sensible price. We will be monitoring this company closely should any issues with the merger with Kansas City Southern provide a buying opportunity for our Magic Pants Canadian Portfolio.

The Drivers of Total Return

Posted by BM on July 19, 2021 

“Investor success is driven not so much by picking winning firms, but rather the entry point at which  fine companies are purchased.”

-Tom Connolly

Crestmont Research is a site we visit quite often to help better understand investing. The post we share today will help summarize what Ed Easterling calls ‘The Reconciliation Principle’.

Here is the link to the full article by Crestmont Research:

https://www.crestmontresearch.com/docs/Stock-Reconciliation-Principle.pdf

As dividend growth investors we tend to buy and hold our investments if they continue to increase their earnings and pay a growing dividend. Sometimes this can last for decades. Although holding a good company for the long term is viewed as unconventional by today’s standards, it turns out that looking at things in an unconventional manner can increase your Total Returns, especially when you purchase your quality companies when they are sensibly priced (below average P/E).

“Conventional wisdom holds that stock market returns are random. That is true over days, weeks, months, and even a few years. But contrary to conventional wisdom, stock market returns are highly predictable over periods that reflect investors’ horizons–periods either side of a decade. This predictability occurs because stock market returns are driven by component parts.”

– Ed Easterling

Three Components of Total Return

In an earlier post we talked about Jack Bogle’s expected return formula when it comes to estimating future returns:

Future Market Returns = Dividend Yield + Earnings Growth +/- Change in P/E Ratio

Ed Easterling essentially agrees with Bogle and then expands on Bogles formula by breaking down the drivers behind the three components.

According to Easterling, …”not only is total return from the stock market driven by the fundamental principle of three components, but also each of the three components is driven by fundamental principles. Not one of the three components is a random element. Each of them has a tangible and definitive driver. This set of relationships further reinforces that stock market returns are not random.

Drivers of the Three Components

In summary, earnings per share (EPS) growth is driven by economic growth. P/E expansion and contraction are driven by the inflation rate. Dividend yield is driven by the starting level of the P/E ratio.”

If we agree with Easterling, we know that long term returns are not random but short term returns can be because there are so many noneconomic and nonfinancial factors that can affect the markets. Understanding the drivers of long-term returns helps us as dividend growth investors ‘peel back the cloak’ and see the fundamental principles that drive the market so that we can make informed investing decisions.

Let us apply these principles in today’s market. Which of the three drivers do you hear the most talk about?

With the other components (Dividend Yield and EPS Growth) being in the range of their historical averages, I think we can all agree that P/E levels today are the outlier, being substantially higher than average for many stocks. With inflation being the principle that drives the P/E component of Total Return, we need to pay attention to inflation. The market is high right now. It would not be a good time to buy an index fund. Companies whose returns have benefitted from rising P/E’s over the last few years will certainly come under pressure if inflation continues to rise.

One of my DGI mentors, Chuck Carnevale, likes to say that it is a ‘market of stocks not a stock market’, I agree. Not all stocks have higher than average P/E’s. Knowing the components of long term returns and their drivers is empowering to say the least. Be selective when you invest in today’s market and only invest in quality companies that are sensibly priced.

‘The List’ – Portfolio Review (July 2021)

Posted by BM on July 7, 2021

Each month I will walk through our valuation process using a stock on ‘The List’ that meets our minimum screen of 6.5% EPS Yld. This month it is Stella Jones (SJ-T).

Valuation is the second step in our three-step process. Buying when our quality stocks are sensibly priced will help ensure our future investment returns meet our expectations. We rely heavily on the fundamental analyzer software tool (FASTgraphs) to help us understand the fundamentals of the stocks we invest in and then read the company’s website for investor presentations and recent earnings reports to learn more.

SJ Portfolio

Intro:

Stella-Jones Inc. is a Canada-based company that is focused on producing industrial pressure-treated wood products. The Company operates through two segments: pressure-treated wood and logs and lumber. The pressure-treated wood segment includes railway ties, utility poles, residential lumber and industrial products. The logs and lumber segment comprise of the sales of logs harvested in the course of the Company’s procurement process that are determined to be unsuitable for use as utility poles. Also included in this segment is the sale of excess lumber to local home-building markets. Its Operating plants are located in approximately six Canadian provinces and nineteen American states. The Company also operates a distribution network across North America. The Company also provides customized services, such as pre-plating, pre-boring, railway crossing panels, end-plating and bridge timbers to specification.

Historical Graph:

SJ Historical
Source: FASTgraphs

Comments:

Stella Jones typically trades in a ‘valuation corridor’ between a 15 and 20 P/E. Investment opportunities when the price (Black Line) is under the 15 P/E line (Orange Line), where it is now, are rare. The Red Line is the dividend yield and we can see that Stella Jones is currently offering one of its highest starting yields in a decade. The low payout ratio signified by the White Line is quite low as well which gives us some comfort knowing our dividend is safe from any short-term market pressures.

Performance Graph:

SJ Performance
Source: FASTgraphs

Comments:

Stella Jones has an excellent dividend growth record averaging over 20% per year over the last ten years. Although the starting yield is low you can see how quickly your yield on cost can grow and provide you with growing income. The annualized rate of return (ROR) of 18.3% is excellent as well and seems to align nicely with dividend growth. Another example of ‘as the dividend grows so does the price’.

Estimated Earnings:

SJ 2YR Estimate
Source: FASTgraphs

Comments:

There are eight analysts covering Stella Jones and the earnings estimates are being revised upwards from both three months and six months ago. This is a positive sign. When we project out to the end of 2022 you can see analysts are expecting an annual return of 31.99% on a purchase at today’s price.

Analyst Scorecard:

SJ Analyst Scorecard
Source: FASTgraphs

Comments:

Analyst estimates over the years are quite accurate based on one and two-year earnings projections. Analysts projections have either hit or beat 75% of the time on one and two-year estimates.

Recent Earnings Report-Q1 2021:

Montreal, Quebec – May 3, 2021 – Stella-Jones Inc. (TSX: SJ) (“Stella-Jones” or the “Company”) today announced financial results for its first quarter ended March 31, 2021.

  • Sales increased 23% to a first quarter record of $623 million
  • EBITDA rose 57% to $99 million, or a margin of 15.9%
  • Net income doubled to reach $56 million or $0.85 per share
  • Solid financial position with a net debt-to-EBITDA ratio of 2.2x
  • Annual 2021 EBITDA guidance raised to $450 to $480 million
  • Entered into a new senior unsecured credit agreement of up to US$350 million, subsequent to quarter-end

“We had an exceptionally robust start to the year, continuing our momentum of growth. Our first quarter performance was fueled by record pricing and volume gains in the residential lumber product category, solid utility poles results, and strong railway ties demand tempered by pricing pressures in certain markets. EBITDA grew by 57% to an all-time first quarter high of $99 million and net income doubled to $56 million compared to the same period last year,” stated Éric Vachon, President and CEO of Stella-Jones.

“In anticipation of continued strong market conditions for residential lumber and solid demand in the other core product categories, we leveraged our healthy balance sheet this quarter to increase working capital and invest in our network. In April, we increased our available liquidity with a new senior unsecured credit facility, further enhancing our financial flexibility. Together with our resilient business model and solid competitive position, we are well positioned to take advantage of the momentum in demand, create opportunities to grow our core businesses and deliver EBITDA in the mid-to-high $400 million range in 2021,” concluded Mr. Vachon.

Updated Outlook

The Company’s financial outlook provided in the MD&A for the year ended December 31, 2020 is updated to reflect the strong quarterly performance, largely attributable to the unprecedented rise in the market price of lumber, and the expectation that the higher levels of pricing for lumber will continue to favorably impact the profitability of the residential lumber product category during the seasonal peak demand period.

Stella-Jones is now targeting to deliver EBITDA in the range of $450 to $480 million in 2021, up from the previously disclosed guidance of $385 to $410 million. This updated guidance anticipates a reduction of approximately $90 million in sales from the depreciation of the value of the U.S. dollar relative to the Canadian dollar to C$1.27 per U.S. dollar.

Excluding the impact of the currency conversion, the Company is projecting 2021 sales growth of 15% to low 20% range compared to 2020. The projected 2021 sales for utility poles, railways ties and industrial products remain unchanged. Utility poles sales are expected to increase in the mid to high-single digit range compared to 2020, due to sustained healthy replacement demand, including an increase in value-added fire-resistant wrapped pole sales, while railway ties and industrial product sales are projected to be relatively comparable to those generated in 2020. For residential lumber, sales are now forecasted to increase in the range of 45% to 65% compared to 2020, driven by the current trend of higher pricing, which is projected to continue during the seasonal peak demand period for this product category.

Summary:

There is a lot to like about Stella Jones right now from a valuation standpoint. Definitely a company dividend growth investors should be paying close attention to given its recent price weakness.

We buy quality individual dividend growth stocks when they are sensibly priced and hold for the growing income.

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