Month: June 2022

‘The List’ – Portfolio Review (June 2022)

Posted by BM on June 30, 2022

Summary:

This article is part of our monthly series where we highlight companies on ‘The List’ that meet our minimum criteria of 6.5% EPS yield.
A fair valuation is the second rule in our three-step process. Buying when our quality stocks are sensibly priced will help ensure our future investment returns meet our expectations.
This month we will review Stella-Jones Inc. (SJ-T).
Are you looking for a portfolio of ideas like this one? Magic Pants DGI Premium Membership Subscribers get exclusive access to the MP Wealth-Builder Model Portfolio (CDN). Learn More

Proper investing is all about taking advantage of the long-run opportunities that the short-run imbalances give you. In arriving at a sensible price, we use an earnings-determined market price. Emotions determine the market price in the short run, and earnings determine the price in the long run.

We rely heavily on the fundamentals analyzer software tool (FASTgraphs) and YCHARTS to help us understand the operating results of the stocks we invest in. We then read the Company’s website for investor presentations and recent earnings reports to learn more.

Source: FASTgraphs

Intro:

Stella-Jones Inc. (SJ-T) is North America’s leading producer of pressure-treated wood products. It supplies all of the continent’s major electrical utilities and telecommunication companies with wood utility poles and North America’s Class 1, short line and commercial railroad operators with railway ties and timbers.

Stella-Jones also provides industrial products, which include wood for railway bridges and crossings, marine and foundation pilings, construction timbers and coal tar-based products. Additionally, the Company manufactures and distributes premium residential lumber and accessories to Canadian and American retailers for outdoor applications. A significant portion of the business is devoted to servicing the Canadian market through its national manufacturing and distribution network.

Source: Investor Presentation May 2022-Company website

Historical Graph:

Source: FASTgraphs

Comments:

Stella-Jones’ valuation corridor has widened in recent years. For much of the last decade, a sensible price (Black Line) was at or close to the normal P/E (Blue Line). When COVID hit, the volatility of lumber prices either helped or hindered the share price. The normal P/E is now hitting levels not seen since the financial crisis in 2008-09.

The long-term fundamentals show a company whose annualized earnings have grown steadily over the last ten years at ~11.25%. A more recent analysis, however, sees earnings growth slowing to about half of that.

Dividend/Price Growth Alignment:

Comments:

We talk a lot in our blog about dividend growth and price growth alignment over the longer term. Stella-Jones Inc. has grown its dividend much faster than its price has increased. This can sometimes be a red flag if the payout ratio rises too high and puts the dividend at risk. This is not the case with Stella-Jones Inc. as the dividend payout ratio is only 24% and well covered by free cash flow.

We like to see our dividend growers double our income and capital over a decade. (SJ-T) has more than met this criterion.

Yield Chart:

Comments:

Popularized by Investment Quality Trends (IQT) in the 1960s, ‘Dividend Yield Theory’ is simple and intuitive. It says that dividend yields tend to revert to the mean for quality dividend growth stocks, meaning those with stable business models that don’t significantly change over time.

In the case of Stella-Jones Inc., the dividend yield is the highest in the last ten years at 2.32%. According to the theory, (SJ-T) is currently undervalued based on today’s price. A five-year chart will show a similar undervaluation.

Performance Graph:

Source: FASTgraphs

Comments:

Stella-Jones Inc. has had an average annualized dividend growth rate of 19.14% over the last ten years. The Company also has an annualized total return of 12.94% over that period. (SJ-T) recently announced a dividend increase of ~11.0.

Estimated Earnings:

Source: FASTgraphs

Comments:

Using the “Normal Multiple’ estimating tool from FASTgraphs, we see a Normal P/E average over the last five years of 17.58. Based on Analysts’ forecasts one and a half years out, they are estimating an annualized return, based on today’s price, of 60.16% should (SJ-T) trade at its five-year average P/E.

Of importance is that analysts have been revising their estimates for 2022 downward but 2023 and 2024 upwards. Analysts believe the rest of 2022 will be challenging for Stella-Jones Inc. In the longer term, earnings are estimated to recover and grow.

Analyst Scorecard:

Source: FASTgraphs

Comments:

Analyst performance on hitting estimates over the years is above average on one and two-year earnings projections. Analysts’ forecasts have hit or beat ~77% of the time on one-year estimates and ~85% on two-year forecasts.

Recent Earnings Report-Q1 2022:

“With 2022 underway, we are pleased to report first-quarter results that delivered on our expectations,” stated Éric Vachon, President and CEO of Stella-Jones. “Sales increased quarter-over-quarter primarily due to strong organic growth in our infrastructure-related businesses and contributions from the recent Cahaba acquisitions. This growth was largely offset by lower residential lumber sales which, coupled with increasing input costs, pressured our margins. While contractual price adjustments are being implemented to cover escalating costs across the industry supply chain, we anticipate a certain degree of lag until the cost environment stabilizes.”

Sales for the first quarter of 2022 amounted to $651 million, up from sales of $623 million for the same period in 2021. Excluding the contribution from the acquisitions of Cahaba Pressure Treated Forest Products, Inc. and Cahaba Timber, Inc. of $15 million dollars, pressure-treated wood sales rose by $21 million, or 4%, mainly driven by strong organic growth across the Company’s infrastructure-related businesses, namely utility poles, railway ties and industrial products, offset in large part by a decrease in sales for residential lumber and logs and lumber product categories when compared to their exceptional sales growth in the first quarter of 2021.

Pressure-treated wood products:

Utility poles (39% of Q1-22 sales): Utility poles sales amounted to $254 million in the first quarter of 2022, up from $206 million for the same period last year. Excluding the contribution from acquisitions, sales increased 16%, driven by the continued improvement in maintenance demand, upward price adjustments in response to cost increases and a better sales mix, mainly due to the impact of additional fire-resistant wrapped pole sales volumes.

Railway ties (27% of Q1-22 sales): Sales of railway ties amounted to $175 million in the first quarter of 2022, up from $158 million for the corresponding period last year. The sales growth was almost all attributable to favourable sales price adjustments for Class 1 customers, largely to cover higher fibre costs, and higher pricing for non-Class 1 customers. Overall, volumes were relatively unchanged compared to the same period last year.

Residential lumber (20% of Q1-22 sales): Residential lumber sales totalled $132 million in the first quarter of 2022, down from $166 million of sales generated in the first quarter of 2021. This decrease was largely attributable to lower sales volume, offset in part by the higher market price of lumber. While sales in the first quarter of 2022 were lower compared to the strong sales realized in the same quarter last year, they exceeded the $58 million of sales generated in the first quarter of the pre-pandemic year 2019, due to both pricing and volume gains.

Industrial products (5% of Q1-22 sales): Industrial product sales amounted to $33 million in the first quarter of 2022, slightly up compared to the $28 million of sales generated a year ago, largely due to increased demand for pilings and timber.

Logs and lumber:

Logs and lumber (9% of Q1-22 sales): Logs and lumber sales totaled $57 million in the first quarter of 2022, down from $65 million compared to the same period last year. In the course of procuring residential lumber, excess lumber is obtained and resold. The decrease in sales is largely due to less lumber trading activity compared to same period last year.

Outlook:

Stella-Jones’ sales are primarily to critical infrastructure-related businesses. While all product categories can be impacted by short-term fluctuations, the overall business is mostly based on replacement and maintenance-driven requirements, which are rooted in long-term planning. Corresponding to this longer-term horizon and to better reflect the expected sales run-rate for residential lumber and reduce the impact of commodity price volatility, the Company shifted its guidance to a three-year outlook in early 2022. Below are key highlights of the 2022-2024 outlook with a more comprehensive version, including management assumptions, available in the Company’s MD&A.

Key Highlights:

Compound annual sales growth rate in the mid-single digit range from 2019 pre-pandemic levels to 2024;
EBITDA margin of approximately 15% for the 2022-2024 period;
Capital investment of $90 to $100 million to support the growing demand of its infrastructure-related customer base, in addition to the $50 to $60 million of annual capital expenditures;
Residential lumber sales expected to stabilize between 20-25% of total sales while infrastructure-related businesses expected to grow and represent 75-80% of total sales by 2024;
Anticipated returns to shareholders between $500 and $600 million during three-year outlook period;
Leverage ratio of 2.0x-2.5x between 2022-2024, but may temporarily exceed range to pursue acquisitions.

“In terms of market dynamics, customer demand for utility poles remains robust, based on planned infrastructure investments as well as ongoing replacement programs by utility and telecommunication companies. The trend for railway ties is also positive for 2022, although we are experiencing longer than expected tightness in the market supply for untreated ties. Residential lumber sales in the first quarter were higher than expected, but the peak summer season will be more telling as to the overall performance of this business for the year. In short, we are laying the foundation to achieve our three-year strategic plan and our performance for the first quarter provides a good start,” concluded Mr. Vachon.

Analyst coverage:

Analyst Michael Tupholme lowered his price target on shares of the Canadian producer of industrial pressure-treated wood products to $45 from $50, following a series of virtual investor meetings with SJ’s management.

“There was no material new information provided that would cause us to change our views regarding SJ’s overall outlook,” Tupholme said in a note to clients. “Still, on the whole, we characterize management’s commentary and the tone of the meetings as generally encouraging, particularly when considered in the context of recent equity market declines and increased concerns regarding the broader economic outlook.”

“We continue to see SJ’s valuation as overly depressed and believe that the stock offers compelling long-term upside potential,” the analyst said. “At the same time, given current heightened investor concern around the economic outlook, we believe that a recovery in the stock’s valuation may take longer than previously expected, which, along with what we see as a lack of near-term catalysts for SJ, has caused us to lower our recommendation…”

Conclusion:

(SJ-T) is ‘sensibly priced’ at current levels. There is also a margin of safety built-in compared to historical fundamentals. We are watching this one closely for revised guidance or further price weakness and a possible entry point for our MP Wealth-Builder Model Portfolio (CDN). Learn More.

MP Market Review – June 24, 2022

Last updated by BM on June 27, 2022

“When an investor focuses on short-term investments, he or she is observing the variability of the portfolio, not the returns – in short, being fooled by randomness.”

– Nicholas Nassim Taleb

Price declines don’t impact our reason for investing; income. For us, it is about the income stream down the road. We know that our growing yields will eventually drive price gains. We are not distracted by short-term price movements.

One of the reasons we publish ‘The List’ of Canadian dividend growth stocks is to demonstrate how our process works. Each week, we post the income and capital returns of ‘The List’ year-to-date. The main reason for doing this is to show those new to dividend growth investing that there are times when prices decline and short-term capital returns suffer, but we always have growing returns from our dividends. This growing income, combined with an initial starting yield, gets our money working for us until our capital catches up. The dividends on ‘The List’ are doing fine in 2022, up 10.2%, on average, year-to-date.

Compare ‘The List’ 2022 to the decade-long chart below, and you will see the compound annual growth rate of dividends (CAGR 10Y DG) track this year’s dividend growth year-to-date very closely (10.2% vs 10.4%). The price growth (CAGR 10Y PG), however, can vary as we are seeing in 2022 but aligns closely with dividend growth (10.4% vs 11.1%) over time. The starting yield in 2012 plus annual dividend growth was very close to the total return achieved annually of 12.8% (CAGR 10Y TR) of ‘The List’. For those new to dividend growth investing, this is the magic of our strategy!

In summary, price declines don’t matter for dividend growth investors when our portfolios produce the income we need. We know that price growth will eventually catch up.

Performance of ‘The List’

Last week, ‘The List’ was up from the previous week by 2.8% but down YTD with a minus -5.9% price return (capital). Dividend growth of ‘The List’ remains at 10.2% YTD, demonstrating the rise in income over the last year.

The best performers last week on ‘The List’ were Enghouse Systems Limited (ENGH-T), up 10.2%; TFI International (TFII-N), up 7.67%; and Waste Connections (WCN-N), up 6.91%.

Stella Jones (SJ-T) was the worst performer last week, down -3.31%.

Recent News

Enghouse Systems Limited Acquires Competella AB (Source: MT Newswires)

“Competella offers an easy to deploy cloud-based contact center solution that works effectively in the Microsoft Teams,” said Steve Sadler, Chairman & CEO of Enghouse. “Competella is a great fit for us as we have both operated in Sweden for a long time. We are very pleased to welcome Competella’s customers, employees and partners to Enghouse.”

In our MP Market Review-June 10, 2022, we mentioned that Enghouse Systems (ENGH-T) was looking for new acquisitions in the cloud computing space. It appears they found one in Competella AB. One of the takeaways from this news for dividend growth investors is that Enghouse Systems is doing what they said they would do. This creates trust with investors, and one of the reasons (ENGH-T) has been the top performer on ‘The List’ over the last two weeks even though their earnings have suffered YTD.

Canada’s inflation rate spikes to 7.7 per cent in May, highest since 1983 (Source: Globe & Mail)

“We know inflation is keeping Canadians up at night; it’s keeping us up at night,” Carolyn Rogers, senior deputy governor at the Bank of Canada, said on Wednesday at a Globe and Mail event. “And we will not rest easy until we get it back down to target,” which is 2 per cent.

Inflation is still a big issue here in Canada. Governments will do everything they can to get it under control, even if it means taking the economy into a recession. The Bank of Canada makes its next rate decision on July 13. Many expect a 75 basis point hike similar to the one announced by the U.S. Federal Reserve two weeks ago. Remember what happened to stock markets shortly after?

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

Alimentation Couche-Tard (ATD-T) will release its fourth-quarter 2022 results on Tuesday, June 28, 2022, after markets close.

Dividend Increases

Last week, there were no dividend increases from companies on ‘The List.’

Earnings Releases

Last week, there were no earnings releases from companies on ‘The List.’

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. Instead, 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.

The List (2022)
Last updated by BM on June 24, 2022

*Note: The following graph is wide, you can scroll to the right on your device to see more of the data.

SYMBOL	COMPANY	YLD	PRICE	YTD %	DIV	YTD %	STREAK
AQN-N	Algonquin Power & Utilities	5.1%	$13.86	-3.4%	$0.70	5.4%	11
ATD-T	Alimentation Couche-Tard Inc.	0.8%	$55.17	5.9%	$0.44	18.1%	12
BCE-T	Bell Canada	5.8%	$63.28	-4.0%	$3.64	4.0%	13
BIP-N	Brookfield Infrastructure Partners	3.9%	$37.09	-8.9%	$1.44	5.9%	14
CCL-B-T	CCL Industries	1.6%	$60.48	-10.8%	$0.96	14.3%	20
CNR-T	Canadian National Railway	2.0%	$146.75	-5.3%	$2.93	19.1%	26
CTC-A-T	Canadian Tire	3.5%	$166.29	-9.2%	$5.85	24.5%	11
CU-T	Canadian Utilities Limited	4.7%	$37.70	3.0%	$1.78	1.0%	50
DOL-T	Dollarama Inc.	0.3%	$74.95	18.2%	$0.22	9.2%	11
EMA-T	Emera	4.4%	$59.80	-4.5%	$2.65	2.9%	15
ENB-T	Enbridge Inc.	6.4%	$53.85	8.7%	$3.44	3.0%	26
ENGH-T	Enghouse Systems Limited	2.5%	$29.06	-36.6%	$0.72	16.3%	15
FNV-N	Franco Nevada	0.9%	$138.47	1.7%	$1.28	10.3%	14
FTS-T	Fortis	3.6%	$59.77	-1.2%	$2.14	2.9%	48
IFC-T	Intact Financial	2.2%	$180.42	10.2%	$4.00	17.6%	17
L-T	Loblaws	1.3%	$114.71	11.7%	$1.54	12.4%	10
MGA-N	Magna	3.1%	$57.87	-29.1%	$1.80	4.7%	12
MRU-T	Metro	1.6%	$68.88	2.7%	$1.10	12.2%	27
RY-T	Royal Bank of Canada	4.0%	$124.34	-9.1%	$4.96	14.8%	11
SJ-T	Stella-Jones Inc.	2.6%	$31.28	-23.1%	$0.80	11.1%	17
STN-T	Stantec Inc.	1.3%	$56.06	-20.1%	$0.71	6.8%	10
TD-T	TD Bank	4.3%	$83.74	-15.7%	$3.56	12.7%	11
TFII-N	TFI International	1.4%	$78.59	-29.0%	$1.08	12.5%	11
TIH-T	Toromont Industries	1.5%	$100.95	-11.2%	$1.52	15.2%	32
TRP-T	TC Energy Corp.	5.3%	$66.81	11.9%	$3.57	4.4%	21
T-T	Telus	4.6%	$28.89	-2.9%	$1.33	6.2%	18
WCN-N	Waste Connections	0.7%	$122.73	-8.5%	$0.92	8.9%	12
Averages		2.9%		-5.9%		10.2%	18

MP Market Review – June 17, 2022

Last updated by BM on June 20, 2022

“It’s true. So many of you were sold a bald-faced lie and unknowingly believed it. What was it? That you need to sell your assets to fund your retirement.

So many are trapped in fear, worry, and panic. They hopelessly cling to the coat sleeves of those who put them in that situation, hoping they can get them through it!

I have another idea, fire them.” Rida Morwa, Seeking Alpha Contributor

You rarely hear someone call things as they are these days, so a big shout out to Mr. Morwa. He is speaking about the volatility of the current market and the damage it is doing to retirement portfolios that are dependent on selling assets to pay the bills.

We learned this lesson ourselves after the 2008 financial crisis and started to do things differently. We sleep much better at night now by building a portfolio of quality dividend growth stocks and not having to sell into a down market to fund our retirement. In fact, we welcome down markets so that we can buy more income at lower prices.

Sometimes it takes markets like this one to drive home the concept that true wealth building has for generations come from passive and recurring income streams, not from buying and selling stocks.

Check out our MP Wealth-Building Model Portfolio Business Plan (CDN) and subscribe today to learn more.

Performance of ‘The List’

Last week, ‘The List’ was down with a minus -8.3% YTD price return (capital). Dividend growth of ‘The List’ remains at 10.2% YTD, demonstrating the rise in income over the last year.

The best performers last week on ‘The List’ were Enghouse Systems Limited (ENGH-T), up 6.16%; Dollarama (DOL-T), up 0.78%; and Canadian National Railway (CNR-T), up 0.31%.

Magna International (MGA-N) was the worst performer last week, down -10.53%.

Recent News

TELUS Agrees to Buy Canada HR Services Provider LifeWorks for $2.24 Billion (Source MT Newswires)

The overall take on the deal from what I have read is that the deal was expensive for Telus. On the positive side of the ledger, Telus is financing the deal with cash on hand and 37 million Telus shares. By all our metrics, Telus shares are expensive at today’s price, so if you want to pay up for a deal do it with your own expensive shares.

We would like to see Q2 earnings reported and a better margin of safety before digging deeper into fundamentals for this quality dividend grower.

U.S. Federal Reserve hikes interest rate by the largest amount since 1994 (Source: Globe & Mail)

You would have to live under a rock if you missed the U.S. Federal Reserve announcement of a .75% hike in interest rates last week. Stocks did what stocks do when interest rates rise quickly. They dropped. What’s happening is that many stocks are giving back gains they should never have had in the first place.

This was the first time in 2022 we saw Canadian stocks drop in tandem with their U.S. counterparts. The yield of ‘The List’ is now 3%. As prices drop, yield goes up. This is the highest it has been YTD.

We must remember, however, that central banks are just getting started with their interest rate hikes. More rate hikes and a poor Q2 earnings season, and things could still get a lot worse before they get better.

Dividend Increases

Last week, there were no dividend increases from companies on ‘The List.’

Earnings Releases

Last week, there were no earnings releases from companies on ‘The List.’

No companies on ‘The List’ are due to report earnings this 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 (2022)
Last updated by BM on June 17, 2022

*Note: The following graph is wide, you can scroll to the right on your device to see more of the data.

SYMBOL	COMPANY	YLD	PRICE	YTD %	DIV	YTD %	STREAK
AQN-N	Algonquin Power & Utilities	5.4%	$12.96	-9.7%	$0.70	5.4%	11
ATD-T	Alimentation Couche-Tard Inc.	0.8%	$53.04	1.8%	$0.44	18.1%	12
BCE-T	Bell Canada	5.9%	$61.93	-6.0%	$3.64	4.0%	13
BIP-N	Brookfield Infrastructure Partners	3.8%	$37.66	-7.5%	$1.44	5.9%	14
CCL-B-T	CCL Industries	1.6%	$58.72	-13.4%	$0.96	14.3%	20
CNR-T	Canadian National Railway	2.1%	$140.89	-9.0%	$2.93	19.1%	26
CTC-A-T	Canadian Tire	3.6%	$162.51	-11.3%	$5.85	24.5%	11
CU-T	Canadian Utilities Limited	4.8%	$37.13	1.4%	$1.78	1.0%	50
DOL-T	Dollarama Inc.	0.3%	$71.99	13.5%	$0.22	9.2%	11
EMA-T	Emera	4.6%	$57.71	-7.8%	$2.65	2.9%	15
ENB-T	Enbridge Inc.	6.5%	$52.71	6.4%	$3.44	3.0%	26
ENGH-T	Enghouse Systems Limited	2.7%	$26.37	-42.5%	$0.72	16.3%	15
FNV-N	Franco Nevada	0.9%	$139.00	2.1%	$1.28	10.3%	14
FTS-T	Fortis	3.7%	$57.96	-4.2%	$2.14	2.9%	48
IFC-T	Intact Financial	2.3%	$176.47	7.8%	$4.00	17.6%	17
L-T	Loblaws	1.4%	$109.74	6.8%	$1.54	12.4%	10
MGA-N	Magna	3.3%	$54.87	-32.7%	$1.80	4.7%	12
MRU-T	Metro	1.6%	$67.30	0.4%	$1.10	12.2%	27
RY-T	Royal Bank of Canada	4.0%	$124.53	-9.0%	$4.96	14.8%	11
SJ-T	Stella-Jones Inc.	2.5%	$32.35	-20.5%	$0.80	11.1%	17
STN-T	Stantec Inc.	1.3%	$54.75	-22.0%	$0.71	6.8%	10
TD-T	TD Bank	4.1%	$86.44	-13.0%	$3.56	12.7%	11
TFII-N	TFI International	1.5%	$72.99	-34.1%	$1.08	12.5%	11
TIH-T	Toromont Industries	1.6%	$97.67	-14.1%	$1.52	15.2%	32
TRP-T	TC Energy Corp.	5.5%	$65.32	9.4%	$3.57	4.4%	21
T-T	Telus	4.6%	$28.69	-3.6%	$1.33	6.2%	18
WCN-N	Waste Connections	0.8%	$114.80	-14.4%	$0.92	8.9%	12
Averages		3.0%		-8.3%		10.2%	18

We Just Bought Franco-Nevada (FNV-T) for our MP Wealth-Builder Model Portfolio (CDN)

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MP Market Review – June 10, 2022

Last updated by BM on June 13, 2022

“Stocks like any other investment only have value because of their ability to return cash to their owners. Would you purchase an apartment building if the tenants did not pay rent!” Tom Connolly

Investing in real estate is an excellent parallel to dividend growth investing. As an investor in rental units, your building becomes more valuable as your rental income rises.

We publish the decade-long returns of dividends and price every year to demonstrate that as our income grows so does our capital.

Here is the data from January 2012 to January 2022.

10YR_CAGR-The List-01-01-2022

Notice the 10YR Averages of the compound annual dividend growth rate (CAGR 10Y DG) and compound annual price growth (CAGR 10Y PG) of ‘The List’ in this spreadsheet. The evidence is hard to refute…as the dividend grows, the price grows at about the same rate.

Getting the dividend growth right tilts the deck in our favour and increases the probability of an above-average total return (CAGR 10Y TR).

Performance of ‘The List’

Last week, ‘The List’ was down with a minus -3.4% YTD price return (capital). Dividend growth of ‘The List’ remains at 10.2% YTD, demonstrating the rise in income over the last year.

The best performers last week on ‘The List’ were Franco Nevada (FNV-N), up 2.2%; Dollarama Inc. (DOL-T), up 1.9%; and Canadian Utilities Limited (CU-T), at 0.0%.

Enghouse Systems Ltd. (ENGH-T) was the worst performer last week, down -26.3%. More on (ENGH-T) in the sections below.

Recent News

Alimentation Couche-Tard (ATD-T) Hiring More Than 25,000 Team Members Across Global Network (Source: PR Newswire)

“LAVAL, QC, June 8, 2022 /CNW Telbec/ – With the start of summer, Alimentation Couche-Tard Inc. (“Couche-Tard”), a global leader in convenience and mobility, is hiring for more than 25,000 positions at its more than 14,100 Circle K and Couche-Tard convenience stores and support centers across North America, Europe and Asia.”

“Passionate, diverse and talented team members are key to ensuring a great store and fueling experience for our customers and making their lives a little easier every day, which is why we are ramping up our hiring efforts as we head into the summer travel season,” said Ina Strand, Chief People Officer for Couche-Tard. “Whether applicants are looking for seasonal employment or an exciting career with a dynamic global retailer, we provide the resources and ‘One Team’ culture to help them find growth and fulfillment and a global brand with an array of programs that create award-winning engagement among our team members.”

(ATD-T) is one of the few companies hiring in an economy that is slowing. We believe this combined with their recent dividend increase (25%), shows us that management is confident in the future. A pullback in price last week has us watching closely.

U.S. inflation hit a new 40-year high of 8.6% in May (Source: Globe & Mail)

“The prices of gas, food and most other goods and services jumped in May, raising inflation to a new four-decade high and giving American households no respite from rising costs.”

“Virtually every sector has higher-than-normal inflation,” said Ethan Harris, head of global economic research at Bank of America. “It’s made its way into every nook and cranny of the economy. That’s the thing that makes it concerning because it means it’s likely to persist.”

The article says that central banks face a tricky balancing act. They need to cool down inflation and the economy with interest rate hikes but not so much that they create a recession.

Patience is critical as the Q2 earnings season is only a month away. In our weekly MP Market Review summaries, we have been regularly tracking the rise of inflation and its effects on the companies we follow. These effects will begin to show up in earnings estimates and then in stock prices.

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

Dividend Increases

Last week, there were no dividend increases from companies on ‘The List.’

Earnings Releases

Last week, there were two earnings releases from companies on ‘The List.’

Dollarama Inc. (DOL-T)

“With the lifting of COVID-19 restrictions across Canada early in the quarter, we were pleased to see a double-digit increase in customer traffic, coupled with strong demand for our affordable, everyday consumables and seasonal goods. Our strong performance across key metrics in the first quarter reflects the relevance of our business model and positive consumer response to our value proposition in a high-inflation environment,” said Neil Rossy, President and CEO. “Mindful of the challenging environment in which we are operating, we will continue to rely on the levers at our disposal to mitigate ongoing supply chain and cost pressures, while providing consumers with the best relative value on the market,” he added.

Highlights:

Fiscal 2023 First Quarter Results Highlights Compared to Fiscal 2022 First Quarter Results

Sales increased by 12.4% to $1,072.9 million
Comparable store sales grew 7.3%
EBITDA increased by 20.9% to $300.0 million, or 28.0% of sales, compared to 26.0% of sales
Operating income increased by 24.4% to $220.0 million, or 20.5% of sales, compared to 18.5% of sales
Diluted net earnings per share increased by 32.4% to $0.49, compared to $0.37
10 net new stores opened, compared to 12 net new stores
1,444,803 common shares repurchased for cancellation for $107.3 million

Outlook:

In what is expected to remain a complex environment, Dollarama is well-positioned to pursue its profitable growth and to deliver on its purpose. The Corporation is committed to providing Canadians from all walks of life with compelling value on every dollar they spend, and with proximity and convenient access to a broad range of affordable, everyday items.

In the first half of Fiscal 2023, the Corporation expects to benefit from a favourable sales environment compared to the same period last year, at which time various COVID-19 restrictions impacting retailers and consumer shopping patterns were in place. Supply chain and other inflationary pressures are expected to be felt more in Fiscal 2023. The Corporation has levers at its disposal to mitigate some of the cost pressures on its gross margin. SG&A, excluding any incremental COVID-related costs, is expected to benefit from positive scaling and improved labour productivity. The Corporation will maintain its balanced approach to capital allocation in support of organic growth as well as for maintenance and transformational initiatives. It will also continue to return capital and generate value for shareholders, prioritizing the repurchase of shares under its normal course issuer bid.

Based on the above, the Corporation expects the following for Fiscal 2023:

To open 60 to 70 net new stores

Gross margin as a percentage of sales to be in the range of 42.9% to 43.9%
SG&A as a percentage of sales to be in the range of 13.8% to 14.3%
To deploy $160 million to $170 million in capital expenditures
To actively repurchase shares under its normal course issuer bid

See full Earnings Release here

Dollarama Inc.’s share price continues to soar to new heights. Their recent earnings report will do nothing to change this. Companies like (DOL-T) not only have brand power they also have pricing power. These are the companies that do well in an inflationary environment. If you recall an earlier article this year in the Globe & Mail (March 30), they announced a hike in their highest price items from $4 to $5. They also continue to open more stores and are excelling at managing supply chain issues. They are on track to meet the guidance communicated coming into this year. The only cautionary signal we could find is that their Fiscal 2023 Q1 comparables were very good because sales suffered from lockdowns in Fiscal Q1 2022. Although they have a terrific business model, the valuation is a little too frothy for us at the moment.

Enghouse Systems Limited (ENGH-T)

“Excluding the impact of foreign exchange, our Asset Management Group had comparable revenues to the second quarter of 2021. Our Interactive Management Group is experiencing increased competition from cloud solutions providers as the market shifts towards the cloud as more businesses adopt work from home operating models,” the company said in a release.

Highlights:

The software and services company said it earned C$17.87 million, or C$0.32 per share, in the quarter ended April 30, down from C$20.74 million, or C$0.37. Revenue fell 9.4% to C$106.31 million.

Financial and operational highlights for the three and six months ended April 30, 2022 compared to the three and six months ended April 30, 2021 are as follows:

Revenue achieved was $106.3 and $217.4 million, respectively, compared to revenue of $117.3 and $236.4 million;
Results from operating activities was $31.1 and $66.8 million, respectively, compared to $36.9 and $77.6 million;
Net income was $17.9 and $39.5 million, respectively, compared to $20.7 and $41.4 million;
Adjusted EBITDA was $33.8 and $72.3 million, respectively, compared to $40.2 and $84.7 million;
Cash flows from operating activities excluding changes in working capital was $34.5 and $73.3 million, respectively, compared to $42.6 and $84.3 million.

See full Earnings Release here

We took the opportunity to join Enghouse’s Q2 2022 Conference Call to learn more about the quarterly reduction in earnings and their strategy going forward. As expected, the company is confident it can turn things around. Weaker earnings comparisons came from a better than average 2021, unfavourable foreign exchange costs in Europe and a shortfall in their shift to cloud computing solutions which lagged the market.

(ENGH-T) is addressing the cloud computing shortfall in their product mix and expects this to help with earnings. Another critical bit of information we gleaned from the conference call dealt with their acquisition strategy. Enghouse is a company that has traditionally grown its earnings by acquiring companies and integrating them efficiently. There have been no acquisitions in the past year. Management believes the opportunity to purchase attractively valued tech companies is much closer now with the pullback in valuations, and their decision to wait was a good one. They have recently added to their acquisition team to take advantage of these opportunities.

(ENGH-T) A classic example of a smaller cap dividend growth company getting punished by the market when they miss earnings in a bear market. We learned this lesson from our first ten years of dividend growth investing. It was ‘Lesson #1’!

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

The List (2022)
Last updated by BM on June 10, 2022

*Note: The following graph is wide, you can scroll to the right on your device to see more of the data.

SYMBOL	COMPANY	YLD	PRICE	YTD %	DIV	YTD %	STREAK
AQN-N	Algonquin Power & Utilities	5.0%	$14.18	-1.2%	$0.70	5.4%	11
ATD-T	Alimentation Couche-Tard Inc.	0.8%	$54.70	5.0%	$0.44	18.1%	12
BCE-T	Bell Canada	5.4%	$67.11	1.8%	$3.64	4.0%	13
BIP-N	Brookfield Infrastructure Partners	3.6%	$60.30	-1.3%	$2.16	5.9%	14
CCL-B-T	CCL Industries	1.6%	$59.29	-12.5%	$0.96	14.3%	20
CNR-T	Canadian National Railway	2.1%	$140.46	-9.3%	$2.93	19.1%	26
CTC-A-T	Canadian Tire	3.5%	$166.72	-9.0%	$5.85	24.5%	11
CU-T	Canadian Utilities Limited	4.5%	$39.65	8.3%	$1.78	1.0%	50
DOL-T	Dollarama Inc.	0.3%	$71.43	12.6%	$0.22	9.2%	11
EMA-T	Emera	4.3%	$62.17	-0.7%	$2.65	2.9%	15
ENB-T	Enbridge Inc.	5.9%	$58.18	17.4%	$3.44	3.0%	26
ENGH-T	Enghouse Systems Limited	2.9%	$24.84	-45.8%	$0.72	16.3%	15
FNV-N	Franco Nevada	0.9%	$146.80	7.9%	$1.28	10.3%	14
FTS-T	Fortis	3.4%	$62.35	3.1%	$2.14	2.9%	48
IFC-T	Intact Financial	2.2%	$181.08	10.6%	$4.00	17.6%	17
L-T	Loblaws	1.3%	$114.93	11.9%	$1.54	12.4%	10
MGA-N	Magna	2.9%	$61.33	-24.8%	$1.80	4.7%	12
MRU-T	Metro	1.6%	$69.12	3.1%	$1.10	12.2%	27
RY-T	Royal Bank of Canada	3.9%	$128.55	-6.1%	$4.96	14.8%	11
SJ-T	Stella-Jones Inc.	2.3%	$34.89	-14.2%	$0.80	11.1%	17
STN-T	Stantec Inc.	1.3%	$56.30	-19.8%	$0.71	6.8%	10
TD-T	TD Bank	3.9%	$91.62	-7.8%	$3.56	12.7%	11
TFII-N	TFI International	1.4%	$77.04	-30.4%	$1.08	12.5%	11
TIH-T	Toromont Industries	1.4%	$106.35	-6.5%	$1.52	15.2%	32
TRP-T	TC Energy Corp.	4.9%	$72.62	21.6%	$3.57	4.4%	21
T-T	Telus	4.4%	$30.36	2.0%	$1.33	6.2%	18
WCN-N	Waste Connections	0.7%	$123.55	-7.8%	$0.92	8.9%	12
Averages		2.8%		-3.4%		10.2%	18

MP Market Review – June 3, 2022

Last updated by BM on June 6, 2022

“Success in investing has two parts: finding the edge and fully taking advantage of it through proper position sizing. Almost all investment firms focus on edge, while position sizing generally gets less attention.” Michael Mauboussin, Thirty Years: Reflections on the Ten Attributes of Great Investors

In his paper, Mauboussin speaks about the famous card counting system deployed by MIT students for the game of Blackjack as an example of finding an ‘edge.’ The students found their edge by counting cards and then took advantage of that edge when the remaining cards in the deck were in their favour (more face cards), they bet larger.

Translating his concept to investing, Mauboussin found that great investors find an edge and then take advantage of their edge through position sizing.

We agree with Mauboussin that our edge as dividend growth investors is first finding quality dividend growth companies and then taking advantage of that edge through position sizing. We allocate more to the highest quality companies.

Like the card counting strategy, we add to our position sizes (increase our bets) when our quality companies are sensibly priced and more aggressively when they go on sale. To dividend growth investors, this is equivalent to having many face cards left in the deck and increases the probability of better long-term returns.

To see our ‘position sizing’ and ‘quality rankings,’ subscribe to our Magic Pants Wealth-Builder Model Portfolio (CDN) by clicking this link. Scroll to the bottom of the Subscribe page to get started.

Performance of ‘The List’

Last week, ‘The List’ brought our YTD price return (capital) back to even. Dividend growth of ‘The List’ remains at 10.2% YTD, demonstrating the rise in income over the last year.

The best performers last week on ‘The List’ were Stantec (STN-T), up 4.5%; Brookfield Infrastructure Partners (BIP-N), up 3.9%; and TFI International (TFII-N), up 3.7%.

Dollarama Inc. (DOL-T) was the worst performer last week, down -1.8%.

Recent News

CCL Industries Announces Bolt-on Acquisition for Avery (CCL-B-T)

Geoffrey T. Martin, President and Chief Executive Officer of CCL Industries Inc., commented, “This transaction is an excellent complement to the recent MasterTag acquisition in the United States, offering significant synergies while benefiting from Avery’s digital and e-commerce marketing expertise. We welcome Floramedia’s leader, Joris Verweij, and his talented team to our Company.”

CCL-T has been a dividend growth star over the last decade, with a dividend growth rate that has been close to 20% annually. Earnings growth has slowed recently, so acquisitions are one way to get back on track.

Sorry, but markets aren’t even close to bottoming. Here’s how to know when to start buying

“The stock market, my friends, is following a familiar pattern of a recessionary bear market. The first phase is the Fed-induced price-to-earnings multiple contraction. Typically, the first 20-per-cent drawdown is all about how liquidity drainage causes the P/E multiple to shrink – typically by four percentage points in this first instalment of the recession bear market.”

We have already seen this in the US markets and on a few of our stocks on ‘The List’ here in Canada.

“Every recession in the economy necessarily involves a contraction in earnings, which hasn’t happened yet. It’s all been about the multiple.”

The author says that earnings contraction is the next shoe to drop. This will happen when analysts come to grips with reality and begin to cut their numbers. We have not seen much of this in Canada yet. Paying close attention to Q2 earnings will give us a clearer picture of when.

The author also leaves us with a warning.

“And it also means that once the analysts start to come to grips with reality and begin to cut their numbers, investors who are dipping their toes back into the market now because they believe that valuations have “improved” enough will face an ugly reality.”

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

Enghouse Systems Limited (ENGH-T) will release its second-quarter 2022 results on Tuesday, June 7, 2022, after markets close.

Dollarama Inc. (DOL-T) will release its second-quarter 2022 results on Wednesday, June 8, 2002, before markets open.

Dividend Increases

Last week, there were no dividend increases from companies on ‘The List.’

Earnings Releases

Last week, there were no earnings releases from companies on ‘The List.’

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.

The List (2022)
Last updated by BM on June 3, 2022

*Note: The following graph is wide, you can scroll to the right on your device to see more of the data.

SYMBOL	COMPANY	YLD	PRICE	YTD %	DIV	YTD %	STREAK
AQN-N	Algonquin Power & Utilities	4.8%	$14.63	2.0%	$0.70	5.4%	11
ATD-T	Alimentation Couche-Tard Inc.	0.8%	$57.70	10.7%	$0.44	18.1%	12
BCE-T	Bell Canada	5.3%	$68.57	4.0%	$3.64	4.0%	13
BIP-N	Brookfield Infrastructure Partners	3.4%	$62.62	2.5%	$2.16	5.9%	14
CCL-B-T	CCL Industries	1.6%	$60.80	-10.3%	$0.96	14.3%	20
CNR-T	Canadian National Railway	2.0%	$147.66	-4.7%	$2.93	19.1%	26
CTC-A-T	Canadian Tire	3.4%	$172.41	-5.9%	$5.85	24.5%	11
CU-T	Canadian Utilities Limited	4.5%	$39.66	8.3%	$1.78	1.0%	50
DOL-T	Dollarama Inc.	0.3%	$70.12	10.6%	$0.22	9.2%	11
EMA-T	Emera	4.2%	$63.18	0.9%	$2.65	2.9%	15
ENB-T	Enbridge Inc.	5.8%	$58.93	19.0%	$3.44	3.0%	26
ENGH-T	Enghouse Systems Limited	2.1%	$33.72	-26.5%	$0.72	16.3%	15
FNV-N	Franco Nevada	0.9%	$143.70	5.6%	$1.28	10.3%	14
FTS-T	Fortis	3.4%	$62.81	3.9%	$2.14	2.9%	48
IFC-T	Intact Financial	2.2%	$184.67	12.8%	$4.00	17.6%	17
L-T	Loblaws	1.3%	$117.63	14.5%	$1.54	12.4%	10
MGA-N	Magna	2.8%	$63.95	-21.6%	$1.80	4.7%	12
MRU-T	Metro	1.5%	$71.61	6.8%	$1.10	12.2%	27
RY-T	Royal Bank of Canada	3.8%	$131.95	-3.6%	$4.96	14.8%	11
SJ-T	Stella-Jones Inc.	2.2%	$35.78	-12.0%	$0.80	11.1%	17
STN-T	Stantec Inc.	1.2%	$60.15	-14.3%	$0.71	6.8%	10
TD-T	TD Bank	3.7%	$95.63	-3.7%	$3.56	12.7%	11
TFII-N	TFI International	1.3%	$84.36	-23.8%	$1.08	12.5%	11
TIH-T	Toromont Industries	1.4%	$111.01	-2.4%	$1.52	15.2%	32
TRP-T	TC Energy Corp.	4.8%	$73.87	23.7%	$3.57	4.4%	21
T-T	Telus	4.2%	$31.56	6.0%	$1.33	6.2%	18
WCN-N	Waste Connections	0.7%	$129.16	-3.7%	$0.92	8.9%	12
Averages		2.7%		0.0%		10.2%	18

Month: June 2022

‘The List’ – Portfolio Review (June 2022)

MP Market Review – June 24, 2022

MP Market Review – June 17, 2022

We Just Bought Franco-Nevada (FNV-T) for our MP Wealth-Builder Model Portfolio (CDN)

MP Market Review – June 10, 2022

MP Market Review – June 3, 2022

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