Month: April 2022

Last updated by BM on April 25, 2022

“The difference between what we do and what the others do is quite simple. It has profound implications, though. It’s all in the cash flow and patience needed to wait for it.” Tom Connolly

We recently finished our business plan for the new MP Wealth-Builder Model Portfolio (CDN). As part of the introduction, we referenced a paper written by Jim Garland in 2013 titled ‘Memo to the Darcy Family: To Thine Own Self Be True’.

The paper has a lot of good information. I was very impressed by the long-term objectives of The Jeffrey Company (an endowment fund) that have virtually been unchanged since 1974. I wanted to share them with you because I think they align well with our approach as dividend growth investors.

1. To provide over the long term a stable dividend payout in inflation-adjusted dollars;
2. To provide through long-term principal appreciation the expanding capital base required to achieve Objective #1 in the face of inflation and capital gains taxes;
3. To avoid risks which in the aggregate might reasonably impair the ability to achieve Objective #1; and
4. In determining dividend policy, the Board shall attempt to increase dividends at rates that would theoretically under normal market conditions permit the underlying assets of the Company to grow at similar rates over the long term, thereby presumably providing generally comparable benefits to present and future recipients.

Notice that more than anything else, the dividends the fund provides year after year matter most.

Performance of ‘The List’

‘The List’ was down a bit again last week with a 1.5% YTD price return (capital). Dividend growth of ‘The List’ is 9.2% YTD, demonstrating the rise in income over last year.

The best performers last week on ‘The List’ were TFI International (TFII-N) up 2.3%; Magna International (MGA-N) up 1.2%; and Loblaws (L-T) up .9%.

Stantec Inc. (STN-T) was the worst performer last week, down -5.7%.

Recent News

A couple of news items from Magna International (MGA-N) last week.

LG Magna e-Powertrain, a joint venture (JV) between LG Electronics (LG) and Magna International Inc. (Magna), celebrated the groundbreaking of its new plant in Ramos Arizpe, Mexico. Scheduled for completion in 2023, the new facility will produce inverters, motors, and on-board chargers to support General Motors’ electric vehicle (EV) production. The 260,000 square foot plant will be LG Magna e-Powertrain’s first production base in North America and is expected to create around 400 new jobs.

Magna is expanding its ADAS and electrification footprint with the opening of a new plant in Kechnec, Slovakia. The brownfield facility will support two European automakers and new global entrant. Covering an area of approximately 22,000 square meters, the facility is expected to begin operations in the fourth quarter of this year with plans to hire 100 employees initially in time for start of production.

Magna (MGA-N) has been one of the worst performers on ‘The List’ in 2022. As we mentioned in an earlier post, we think most of the decline was due to its stretched valuation coming into the year. We will learn more in their earnings release this week.

An article published in the Globe and Mail Friday caught our attention.

The TSX just had its worst day of the year – and investors may not like what’s coming next

The article supports our earlier posts in that the author believes the aggressive interest rate hikes will slow the economy to a point that a recession is inevitable. Being patient and looking for opportunities when the market overreacts is critical at this stage for dividend growth investors. In the short term we enjoy the cash flow from our quality dividend growers.

There are four companies on ‘The List’ due to report earnings this week.

Canadian National Railway (CNR-T) will release its first quarter 2022 results on Tuesday April 26, 2002, after markets close.

Canadian Utilities (CU-T) will release its first quarter 2022 results on Wednesday April 27, 2002, after markets close.

TFI International (TFII-N) will release its first quarter 2022 results on Thursday April 28, 2002, after markets close.

Magna International (MGA-N) will release its first quarter 2022 results on Friday April 29, 2002, before markets open.

Dividend Increases

There were no companies on ‘The List’ that announced a dividend increase last week.

Earnings Releases

Metro Inc. reported their Q2 Fiscal 2022 earnings last week.

Metro (MRU-T)

“We are pleased with our results in the second quarter, achieved in a challenging operating environment marked by the Omicron variant and labour shortages throughout the supply chain. Our industry continues to experience higher than normal inflationary pressures and our teams remain focused on providing quality products at competitive prices to our customers. We reached another milestone this quarter with the successful start up of our fully automated frozen distribution center in Toronto. Finally, I am proud to say that for the second time in three years, the Jean Coutu banner has been designated by consumers as the most admired company in Quebec in the latest Leger Reputation survey. This is a reflection of the strength of the brand, the trust of consumers, and the quality of services provided by the pharmacist owners”, declared Eric La Flèche, President and Chief Executive Officer.

Highlights:

• Sales of $4,274.2 million, up 1.9%
• Food same-store sales up 0.8%, and up 11.5% for the first 8 weeks of the second quarter versus 2020 (pre-COVID period)
• Pharmacy same-store sales up 9.4%, and up 11.0% for the first 8 weeks of the second quarter versus 2020 (pre-COVID period)
• Net earnings of $198.1 million, up 5.3% and adjusted net earnings(1) of $204.7 million, up 5.1%
• Fully diluted net earnings per share of $0.82, up 9.3%, and adjusted fully diluted net earnings per share of $0.84, up 7.7%
• $8 million of gift cards paid to front-line employees, the same amount as in the second quarter last year

Outlook:

“At the start of the third quarter, most government measures to curb the pandemic had been lifted, but the ancillary impacts on our industry are ongoing. We continue to face higher than normal inflationary pressures and labour shortages which, if prolonged, could put pressure on margins. In the short term, we expect food sales to remain relatively stable versus last year while we expect continued growth in our pharmacy business although somewhat moderated versus the first half of the year. The labour conflict with our full-time distribution center employees in Toronto, which started on April 2, 2022, was resolved seven days later with the ratification of a new four-and-a-half-year collective agreement. Our third quarter results will be impacted by the direct costs of the strike and the impact of the new labour agreement, estimated at about $10 million pre-tax.”

See full Earnings Release here

Last updated by BM on April 18, 2022

“I like to see that the company was capable of increasing its dividends in the good times and the bad so that I’m more comfortable relying on that income in the future.” -Lowell Miller, The Single Best Investment: Creating Wealth with Dividend Growth

There are many ways to determine ‘quality’ when selecting a company for your portfolio, but we always start with the dividend growth streak. When we put together ‘The List’ each year, we only select companies that have ten years or more of consecutive dividend growth. Determining if these companies will continue to grow their dividends is paramount in what we do. The fact that eight of the companies on ‘The List’ now have dividend growth streaks of twenty plus years, means that a high percentage of them will.

In case you were wondering, those eight companies if purchased on Jan.1, 2012, had an average annual total return of 11.6% and an average annual dividend growth rate of 10.7% over the next ten years!

Performance of ‘The List’

‘The List’ down a bit last week with a 3.1% YTD price return (capital). Dividend growth of ‘The List’ is 9.2% YTD, demonstrating the rise in income over last year.

The best performers last week on ‘The List’ were Canadian National Railroad (CNR-T) up 2.6%; Stantec (STN-T) up 2.6%; and Stella Jones (SJ-T) up 2.6%.

Enghouse Systems (ENGH-T) was the worst performer last week, down -5.3%.

Recent News

Stantec (ST-N) had another good week.

US Army Corps of Engineers Alaska District has selected Stantec (STN-T) for a five-year, civil works contract.

Under the indefinite-delivery/indefinite-quantity multiple award task order contract of US$18 million ($22.7 million), Stantec will provide architecture and engineering design services for civil works projects throughout Alaska.

Stantec (STN-T) is new to ‘The List’ in 2022 and has been in the news lately with their acquisition of UK Consultancy Barton Whitmore and another new project award from Trillium Health Partners in Ontario. Proposed government infrastructure spending can only help the bottom line of this global engineering, architecture, and environmental consulting company.

In other news, inflation continues to be top of mind. In the U.S., inflation hit a rate of 8.5 per cent. That’s the highest in 40 years. In Canada, February’s inflation rate was 5.7 per cent.

How does inflation affect the average person? At an 8.5% inflation rate, a person who works for 12 months and is paid the same amount each month effectively works one month for free.

To control inflation, the Bank of Canada is quickly raising its benchmark rate. They announced a 0.5% rate increase this past week and expect to continue this aggressive approach for the rest of the year. Rate increases are the main tool in our central banks toolbox to help control inflation.

Companies with pricing power can pass along their higher costs due to inflation. Particularly if they sell necessities. Fortunately, some of our good dividend growers are in this category (think Dollarama, Loblaws and Metro to name a few). Companies that lack pricing power are likely to falter.

There is one company on ‘The List’ due to report earnings this week.

Metro (MRU-T) will release its second quarter fiscal 2022 results on Thursday April 21, 2022, before the market opens.

Dividend Increases

There were no companies on ‘The List’ that announced a dividend increase last week.

Earnings Releases

There were no companies on ‘The List’ that reported their earnings last week.

Below is a snapshot of ‘The List’ from last Friday’s close. For a sortable version of ‘The List’ please click on The List menu item.

‘The List’ is not meant to be a template for investors to copy exactly. Rather, its purpose is to provide investment ideas and a real-time illustration of dividend growth investing in action. It is not a ‘Buy List’ nor does it reflect the composition or returns of our Magic Pants Wealth-Builder (CDN) Portfolio. It is only a starting point for our analysis and discussion.

Last updated by BM on April 11, 2022

“To the extent you know that your investments will be held for the very long term, you have automatically self-insured against the uncertainty of short-term market price fluctuations.” P.76 of Winning the Loser’s Game, Charles Ellis

Last updated by BM on April 4, 2022

“The buying frenzy of the past 12 years has lured many market participants into speculative holdings that someday will seem like roach motels, easier to get into than out of.” – Seth Klarman

In an earlier post, ‘Estimating Future Returns’, we talked about speculation and how it can affect market returns in even the best companies.

The post is highlighted by Jack Bogle’s formula for estimating future market returns:

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

Bogle calls the first two components, Yield + Growth, investment aspects of the investment return and the last component, +/- Change in P/E Ratio, the speculative return – what will people pay for a dollar’s worth of earnings?

A few stocks on ‘The List’ have experienced falling prices YTD, not because of the investment aspects of the formula but because they were priced to perfection (speculative return) coming into 2022. People paid a lot for their earnings. When the economy hits a bump in the road or financial results aren’t perfect…down goes the price. A falling price lowers the P/E, so now the speculative return component takes away from the investment return which can turn the future market returns negative in the short run. As dividend growth investors, the way we protect our capital is to be patient and only purchase our companies when they are sensibly priced. This gives our good dividend growers a higher probability of a positive Total Return going forward.

Here is an example of Bogle’s theory in action from a company on ‘The List’:

At one-point last year, Magna (MG-T) was trading at a P/E of 22. Understanding Bogle’s formula, we had a pretty good idea what our future return would look like if we added to our position at that point. Magna (MG-T) has a historical average P/E closer to 11. The investment aspects of Bogle’s formula (Yield + Growth) would not be enough to overcome a significant drop in P/E back to the historical average. We decided to wait until the speculative return came back down to earth. In the end, we were patient and when Magna (MG-T) finally touched its historical P/E in March of this year, we added to our position. At a P/E of 10 we determined the P/E was no longer speculative and the probability of further P/E reductions had decreased considerably. It was time to execute on our process.

Having a time-tested process to value our dividend growers helps increase the odds in our favour for a future positive return and keeps us out of Klarman’s ‘roach motels’.

Performance of ‘The List’

‘The List’ was up last week with a 3.1% YTD price return (capital). Dividend growth of ‘The List’ continues upward with a 9.4% YTD increase in our income over last year.

The best performers last week on ‘The List’ were Dollarama Inc. (DOL-T) up 7.2%; Brookfield Infrastructure Partners (BIP-T) up 5.0%; with both Emera (EMA-T) and Fortis (FTS-T) up 4.0%.

Canadian National Railway (CNR-T) was the worst performer last week, down -5.8%.

One company on ‘The List’, Dollarama Inc. (DOL-T), announced both a dividend increase and an earnings report for Q4 and Full Fiscal Year 2022 (January 2022 year-end).

Recent News

I watched a few videos and listened to some podcasts this week which all had their take on the current state of our economies both here in Canada and abroad. One thing that everyone can agree on is that inflation is no longer ‘transitory’, it is real, and it is here to stay for a while. We see rising prices at the gas pumps, in the grocery stores and now at our ‘dollar’ stores. Dollarama Inc. (DOL-T) announced that price tags up to $5 will begin appearing on its store shelves in the coming year. Until now, Dollarama’s highest price point was $4. I can still remember everything at Dollarama Inc. (DOL-T) being a dollar (as the name implies) only a few years ago.

A good book I am now reading, The Price of Tomorrow by Jeff Booth, has an interesting take on inflation. In the book, Booth equates inflation to ‘theft’. He talks about how inflation is only accelerating the divide between the haves and the have-nots. Owning real assets (quality businesses) instead of holding cash and fixed income is one of the better ways to keep pace with inflation.

One of the things that first attracted us to dividend growth investing was its built-in inflation protected cash flow (growing dividend). Owning companies like Dollarama Inc. (DOL-T) who also have pricing power helps as well.

There are no companies on ‘The List’ due to report earnings this week.

Dividend Increases

There was one company on ‘The List’ that announced a dividend increase this week.

Dollarama Inc. (DOL-T) on Wednesday said it increased its 2022 quarterly dividend from $0.0503 to $.0553 per share, payable May 6, 2022, to shareholders of record on April 15, 2022.

This represents a dividend increase of 10.0% and the 12th consecutive year in which the company has increased its dividend.

Earnings Releases

There was only one company on ‘The List’ to report as we now move into the next quarter (Q1 2022) of earnings releases in late April and May.  Not all companies on the list have a fiscal year-end of December 31. Dollarama Inc. (DOL-T) is one such company with a year end of January 31 which moves them into Fiscal 2023 earnings next.

Dollarama Inc. (DOL-T)

“Dollarama delivered strong operational and financial results in Fiscal 2022, including EPS growth of 20%, all this while navigating the ebb and flow of the pandemic’s impacts on retailers and consumer shopping patterns and in the context of supply chain and inflationary pressures. This remarkable performance speaks to the resilience of our business model and the relevance of our value promise to Canadian consumers, a promise we are committed to fulfilling in what remains a complex and volatile environment as we enter Fiscal 2023,” said Neil Rossy, President and CEO.

Fiscal 2022 Fourth Quarter Results Highlights Compared to Fiscal 2021 Fourth Quarter Results

• Sales increased by 11.0% to $1,224.9 million
• Comparable store sales grew 5.7%
• Gross margin was 45.2% of sales, compared to 45.5% of sales
• EBITDA increased by 20.4% to $393.7 million, or 32.1% of sales, compared to 29.6% of sales
• Operating income increased by 23.3% to $315.7 million, or 25.8% of sales, compared to 23.2% of sales
• Incremental direct costs related to COVID-19 measures totaled $4.4 million, compared to $23.8 million
• Diluted net earnings per share increased by 32.1% to $0.74, compared to $0.56
• 24 net new stores were opened, compared to 23 net new stores
• 5,090,587 common shares were repurchased for cancellation for $318.5 million

Fiscal 2022 Results Highlights Compared to Fiscal 2021 Results

• Sales increased by 7.6% to $4,330.8 million
• Comparable store sales grew 1.7%
• Gross margin was 43.9% of sales, compared to 43.8% of sales
• EBITDA increased by 13.4% to $1,282.6 million, or 29.6% of sales, compared to 28.1% of sales
• Operating income increased by 14.4% to $984.6 million, or 22.7% of sales, compared to 21.4% of sales
• Incremental direct costs related to COVID-19 measures totaled $35.5 million, compared to $84.0 million, of which $2.9 million relates to cost of sales and $81.1 million to SG&A
• Diluted net earnings per share increased by 20.4% to $2.18, compared to $1.81
• 65 net new stores were opened, same as prior year, bringing total store count to 1,421
• 18,176,760 common shares were repurchased for cancellation for $1,059.9 million

See full Q4 2022 Earnings Release here