Category: Uncategorized

‘The List’ – Portfolio Review (March 2022)

Posted by BM on March 23, 2022

Each month we walk through our valuation process using a stock on ‘The List’ that meets our minimum screen of 6.5% EPS Yield. With many of our good dividend growers still not in our ‘sensible price’ range, we sometimes go looking outside of ‘The List’ for candidates. The company we will review today is Manulife Financial (MFC-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.

MFC-T has a dividend streak of eight years. We have added MFC-T to our screen to demonstrate where it sits from a valuation perspective. As you can see, it would be at the top of our list if it was on the 2022 List.

Intro:

Manulife was founded in 1887 in Toronto, Canada (“The Manufacturers Life Insurance Company” by Act of Parliament on 23 June 1887). Manulife provides life insurance and wealth management products and services to individuals and group customers in Canada, the United States, and Asia. Manulife is one of Canada’s Big Three Life Insurance companies (the other two are Sun Life and Great-West Life).

It’s the third-largest insurance company in Canada and the seventh-largest publicly-traded insurance company on earth. But it’s also highly diversified globally.

Asia 48% of operating income
US 21%
Canada 20%
Other 11%

Historical Graph:

Comments:

Manulife Financial has a narrow valuation corridor. As you can see from the Blue Line on the graph (Normal P/E) and the Black Line (Price), there seems to be a correlation between Price and P/E. You would be wise to invest in MFC-T when it is below its average P/E of 10.99.

The fundamentals show a company whose earnings have grown steadily over the last ten years at an annualized rate of ~11.70%. This is rare for a company to have double digit earnings growth and such a high starting yield (5.1%).

Performance Graph:

Comments:

Manulife Financial has an annualized dividend growth rate of 7.97% over the last ten years. The company also has an annualized Total Return of 11.94% over that period. MFC-T recently announced a dividend increase of ~18.0% for 2022 which is more than double their ten-year growth rate. Manulife has been a terrific investment over the last decade, especially as an income holding, with investors in 2012 now generating a 10.32% return on their initial investment from dividends alone.

Estimated Earnings:

Comments:

Using the “Normal Multiple’ estimating tool from FASTgraphs, we see a blended P/E average over the last five years of 9.09. Based on Analysts’ forecasts two years out, you can expect an annualized return based on today’s price of 23.08% should MFC-T trade at its five-year average blended P/E.

Blended P/E is based upon a weighted average of the most recent actual value and the closest forecast value.

Of importance is that Analysts have been revising their estimates upwards recently. Both the six and three months ago projections for 2022 and 2023 have been increasing. It means that Analysts are more bullish on Manulife Financial in the short term.

Analyst Scorecard:

Comments:

Analyst estimates over the years are slightly above average on one and two-year earnings projections. Analysts’ projections have hit or beat ~62% of the time on one-year estimates and ~69% on two-year estimates.

Recent Earnings Report-Q4 2021:

“Our ability to adapt and serve clients across the globe who are navigating a very uncertain environment continues to drive our operating results with record net income of $7.1 billion and core earnings of $6.5 billion in 2021 driven by our insurance businesses delivering double-digit growth in APE sales and NBV and Global WAM delivering strong net inflows of $27.9 billion,” said Manulife President & Chief Executive Officer Roy Gori.

Highlights:

Net income attributed to shareholders of $7.1 billion in 2021, up $1.2 billion from 2020, and $2.1 billion in 4Q21, up $304 million from the fourth quarter of 2020 (“4Q20”)
Core earnings of $6.5 billion in 2021, up 26% on a constant exchange rate basis from 2020, and $1.7 billion in 4Q21, up 20% on a constant exchange rate basis from 4Q202
Strong LICAT ratio of 142%
Core ROE of 13.0% in 2021 and 12.7% in 4Q21, and ROE of 14.2% in 2021 and 15.6% in 4Q21
NBV of $2.2 billion in 2021, up 31% from 2020, and $555 million in 4Q21, up 17% from 4Q20
APE sales of $6.1 billion in 2021, up 13% from 2020, and $1.4 billion in 4Q21, up 5% from 4Q20
Global Wealth and Asset Management (“Global WAM”) net inflows of $27.9 billion in 2021 compared with net inflows of $8.9 billion in 2020 and net inflows of $8.1 billion in 4Q21 compared with net inflows of $2.8 billion in 4Q20. A record year for our retail wealth business with net inflows of $29.2 billion
Global WAM average AUMA increased by 20% in 2021
Remittances were $4.4 billion in 2021 compared with $1.6 billion in 2020, an increase of $2.8 billion
Quarterly common share dividend increased by 18% in 4Q21
Launched a Normal Course Issuer Bid (“NCIB”) that permits repurchase of up to 5% of outstanding common

Summary:

When I first started dividend growth investing, my mentor Tom Connolly made a point of staying away from life insurance companies due to their sub-par dividend growth. I agreed and have not looked at life insurance companies until now. Manulife Financials’ (MFC-T) balance sheet and risk-management look nothing like the company that had to cut its dividend twice during the Great Recession.

MFC-T’s fundamentals look good, and it has been growing earnings since 2016. Throw in a recent 18% dividend increase, an S&P Quality Financial ‘A’ rating, and we like what we see from this up and coming dividend grower. On the macro side, high inflation tends to cause rising interest rates and that’s a boon to financial blue chips like Manulife Financial.

Based on the fundamentals alone, the company seems ‘sensibly priced’ today.

‘The List’ – Portfolio Review (February 2022)

Posted by BM on February 28, 2022

Each month we walk through our valuation process using a stock on ‘The List’ that meets our minimum screen of 6.5% EPS Yield. This month it is Magna International (MG-T).

Intro:

Magna is more than one of the world’s largest suppliers in the automotive space. They are a mobility technology company with a global, entrepreneurial-minded team of over 158,000 employees and an organizational structure designed to innovate like a startup.

With 60+ years of expertise, and a systems approach to design, engineering and manufacturing that touches nearly every aspect of the vehicle, they are positioned to support advancing mobility in a transforming industry. Thier global network includes 343 manufacturing operations and 91 product development, engineering and sales centres spanning 28 countries. Roughly half of Magna’s revenue comes from North America while Europe accounts for approximately 44%

Historical Graph:

Comments:

Magna International has a slightly wider valuation corridor than some of our other dividend growers. As you can see from the Blue Line on the graph (Normal P/E) and the Black Line (Price), there has been quite a swing in valuation recently. A company that traded below a 10 P/E for most of the last decade has now traded at more than a 22 P/E (almost twice its average) as recently as June of 2021.

The fundamentals show a company whose earnings have grown steadily over the last ten years at an annualized rate of ~14.36%. One other thing of note is that with Magna’s transformation into an EV company, Analysts are predicting an uptick in earnings growth out until the end of 2024 at a much higher growth rate (~28%).

Performance Graph:

Comments:

Magna International has an annualized dividend growth rate of 15.86% over the last ten years. The company also has an annualized Total Return of 20.29% over that time period. MG-T recently announced a dividend increase of ~5.0% for 2022 which is about half of last year’s increase. Magna has been a terrific investment over the last decade both from a capital and income growth perspective.

Estimated Earnings:

Comments:

Using the “Normal Multiple’ estimating tool from FASTgraphs, we see a blended P/E average over the last five years of 10.64. Based on Analysts’ forecasts two years out, you can expect an annualized return based on today’s price of 14.67% should MG-T trade at its five-year average blended P/E.

Blended P/E is based upon a weighted average of the most recent actual value and the closest forecast value.

Of importance is that Analysts have been revising their estimates downwards recently. Both the six and three months ago projections for 2022 and 2023 have been dropping. It means that Analysts are more bearish on Magna in the short term.

Analyst Scorecard:

Comments:

Analyst estimates over the years are fairly accurate based on one and two-year earnings projections. Analysts’ projections have hit or beat ~70% of the time on one-year estimates and ~76% on two-year estimates.

Recent Earnings Report-Q4 2021:

“Although 2021 presented its share of challenges, we delivered above-market sales growth and generated solid free cash flow, as we worked closely with our customers and suppliers to minimize the impacts on vehicle production. Despite significant input cost headwinds, we expect improved operating results in 2022 as the industry recovers and production schedules normalize. In addition, we remain confident in our ability to capitalize on the opportunities in front of us, especially in the areas of electrification, autonomy and new mobility.”

– Swamy Kotagiri, Magna’s Chief Executive Officer

Highlights

Fourth Quarter 2021 Highlights

Sales of $9.1 billion decreased 14%, compared to a 17% decrease in global light vehicle production
Diluted earnings per share and adjusted diluted earnings per share of $1.54 and $1.30, respectively, compared to $2.45 and $2.83 last year
Returned $378 million to shareholders through share repurchases and dividends
Raised quarterly cash dividend by 5% to $0.45 per share

Full Year 2021 Highlights

Sales of $36.2 billion increased 11%, compared to global vehicle production which increased 4%
Diluted earnings per share and adjusted diluted earnings per share of $5.00 and $5.13, respectively, compared to $2.52 and $3.95 last year
Returned over $1 billion to shareholders through share repurchases and dividends

Summary:

Input cost increases due to inflation and the semi-conductor crisis have and will continue to affect Magna’s fundamentals in the short run. A belief in the ability of central banks to manage inflation through interest rate hikes and an improvement in the chip shortage situation in the coming year, will be required to see Magna’s fundamentals improve in 2022. Looking further ahead, the company is well positioned to take advantage of growth opportunities as the auto industry undergoes significant transformation.

When we have purchased Magna shares in the past (MP Wealth-Builder CDN Portfolio), it was always when the P/E was below 8. Although those days may be behind us now, we would like to see a further pullback in the share price or at the very least a clear indication that some of the operational headwinds they experienced in 2021 are now behind them. Like most investors right now, we are waiting for a better entry point.

‘The List’ – Portfolio Review (January 2022)

Posted by BM on January 31, 2022

Each month we walk through our valuation process using a stock on ‘The List’ that meets our minimum screen of 6.5% EPS Yld. This month is a little different as we have already reported on companies, in previous reviews, that meet this criterion and there are no new companies to add. There is however one company on ‘The List’ that is valued differently and has recently come into what we would call a ‘sensible price’ range based on its own unique historical valuation pattern. That stock is Franco Nevada Corporation (FNV-T).

Intro:

Franco-Nevada Corp is a precious-metals-focused royalty and investment company. The company owns a diversified portfolio of precious metals and royalty streams, which is actively managed to generate the bulk of its revenue from gold, silver, and platinum. The company does not operate mines, develop projects, or conduct exploration. Franco-Nevada’s short-term financial performance is linked to the price of commodities and the amount of production from its portfolio of producing assets. Its long-term performance is affected by the availability of exploration and development capital. The company holds a portfolio of assets, diversified by commodity, revenue type, and stage of a project, primarily located in the United States, Canada, and Australia.

Historical Graph:

Comments:

Franco Nevada Corp. is another of our good dividend growers that trades within a narrow valuation corridor. As you can see from the Blue Line on the graph (Normal P/E) and the Black Line (Price), there is typically very little variance. Investment opportunities typically occur when the Black Line falls below the Blue Line (53.9 PE) with this quality dividend grower. The fundamentals show a company whose earnings have grown steadily over the last ten years at an annualized rate of ~12.63%.

Performance Graph:

Comments:

Franco Nevada Corp. has an annualized dividend growth rate of 16.42% over the last decade but growth has slowed over the last five years. The company also has an annualized Total Return of 16.16% over that time. FNV-T recently announced another dividend increase of 6.7% for 2022 which is more in line with the recent past.

Estimated Earnings:

Comments:

Using the “Normal Multiple’ estimating tool from FASTgraphs, we see a blended P/E average over the last five years of 63.66. Based on Analysts’ forecasts two years out, you can expect an annualized return of 35.75% should FNV-T trade at its five-year average blended P/E.

Blended P/E is based upon a weighted average of the most recent actual value and the closest forecast value.

Another thing I like about Franco Nevada Corp.’s earnings is that they are being revised upwards from both six months and three months ago for both 2022 and 2023. Analysts seem bullish on FNV-T in the short term.

Analyst Scorecard:

Comments:

Analyst estimates over the years are fairly accurate based on one and two-year earnings projections. Analysts’ projections have hit or beat 75% of the time on one-year estimates and 71% on two-year estimates.

Recent Earnings Report-Q3 2021:

Franco-Nevada Reports Strong Q3 Results; 2021 Energy Guidance Increased

Highlights

“Franco-Nevada delivered a strong third quarter, setting the stage for a record year in 2021. Our diversified portfolio continues to serve us well with strong contributions during the quarter from precious metals, energy and iron ore,” stated Paul Brink, President & CEO. “Higher energy prices have led us to increase our 2021 Energy guidance for the second time this year. Margins have moved higher this year due to the inflation-protected nature of our business model. Franco-Nevada is debt-free and is growing its cash balances.”

Strong Financial Position

No debt and $1.6 billion in available capital as of September 30, 2021
Generated $206.9 million in operating cash flow for the quarter
Quarterly dividend of $0.30/share

Sector-Leading ESG

Ranked #1 gold company by Sustainalytics, AA by MSCI and Prime by ISS ESG
Committed to the World Gold Council’s “Responsible Gold Mining Principles”
Partnering with our operators on community and ESG initiatives
Goal of 40% diverse representation at the Board and top leadership levels

Diverse, Long-Life Portfolio

Most diverse royalty and streaming portfolio by asset, operator, and country
Core assets outperforming since time of acquisition
Growth in long-life reserves

Growth and Optionality

Acquisitions, mine expansions and new mines driving growth
1-million-ounce increase in Measured and Indicated Mineral Resources at Detour Lake
Long-term options in gold, copper and nickel
Noront consolidation likely to accelerate development of Ring of Fire properties

Summary:

Franco Nevada Corp. is one of only two companies in our ‘Double-Double Club’ and has been a stellar performer from a total return perspective for many years now. Although Franco Nevada is weighted heavily in the gold sector, it has been much more stable than the price of gold has been. Those of us who follow macro investing believe that gold may have its day again soon and FNV-T is an excellent way to benefit. The current yield is low at ~1% but growth is acceptable and if you believe that gold is a currency you want exposure to, then you will want to look closely at adding FNV-T to your dividend growth portfolio.

Franco Nevada Corp. appears to be sensibly priced based on historical metrics. It is well below its blended P/E at this point. Both its forecasted earnings growth and dividend growth appear to be trending along recent historical norms. Throw in a recent dividend increase (14 years and counting) and there is a lot to like about FNV-T.

Q4 2021 Earnings Calendar-Intro

Posted by JM on January 21, 2021

Benjamin Graham once remarked that earnings are the principal factor driving stock prices.

Each quarter we will provide readers with weekly earnings updates of stocks on ‘The List’ during the calendar earnings season. Q4 2021 has now ended, and companies are now beginning to report.

Earnings growth and dividend growth tend to go hand in hand so this information can tell us a lot about future dividend growth of our quality companies. Monitoring our dividend growers periodically is part of the process and reading the quarterly earnings releases is a good place to start.

Some of our dividend growers from ‘The List’ have reported quarterly earnings already, based on their fiscal year, with the majority of Q4 2021 earnings scheduled to report in February 2022.

The complete chart can be found below the updated List by selecting ‘The List’ menu item at the top of the site home page.

Q4 Estimates and Results:

SYMBOL	COMPANY	DATE	ESTIMATE	RESULT
ATD-B-T	Alimentation Couche-Tard Inc.	23-Nov	$0.65	$0.65	0.0%
RY-T	Royal Bank of Canada	1-Dec	$2.81	$2.71	-3.6%
TD-T	TD Bank	2-Dec	$1.96	$2.09	6.6%
DOL-T	Dollarama Inc.	8-Dec	$0.57	$0.61	7.0%
ENGH-T	Enghouse Systems Limited	15-Dec	$0.44	$0.54	22.7%

Although most companies on ‘The List’ will probably exceed earnings expectations once again in Q4, macro investors are predicting a slow down in the rate of change of earnings growth in 2022. This will impact valuations and put downward pressure on prices. With very few of our quality dividend growers currently in their ‘sensible’ price range, we are waiting patiently for an opportunity soon to add to our positions.

‘The List’ – Portfolio Review (December 2021)

Posted by BM on December 22, 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 Intact Financial Corp. (IFC-T).

Intro:

Intact Financial Corporation (IFC-T) is the largest provider of property and casualty (P&C) insurance in Canada, a leading provider of global specialty insurance, and, with RSA, a leader in the U.K. and Ireland. The business has grown organically and through acquisitions to over $20 billion of total annual premiums.

In Canada, Intact distributes insurance under the Intact Insurance brand through a wide network of brokers, including its wholly-owned subsidiary BrokerLink, and directly to consumers through Belairdirect. Intact also provides affinity insurance solutions through the Johnson Affinity Groups.

In the U.S., Intact Insurance Specialty Solutions provides a range of specialty insurance products and services through independent agencies, regional and national brokers, and wholesalers and managing general agencies.

Outside of North America, the Company provides personal, commercial and specialty insurance solutions acro ss the U.K., Ireland, Europe and the Middle East through the RSA brands.

Intact directly manages its investments through subsidiary Intact Investment Management. Most of these invested assets are fixed-income securities. Its asset mix is designed to generate interest and dividend income.

Historical Graph:

Comments:

Intact Financial Corp. is another of our good dividend growers that trades within a narrow valuation corridor. As you can see from the Blue Line on the graph (Normal P/E) and the Black Line (Price), there is typically very little variance. Investment opportunities occur when the Black Line falls below the Orange Line (15 PE) with this quality dividend grower. The fundamentals show a company whose earnings have grown steadily over the last ten years at an annualized rate of ~10%.

Performance Graph:

Comments:

Intact Financial Corp. has an annualized dividend growth rate of 9.34% over the last decade. The company also has an annualized Total Return of 12.70% over that time. IFC-T recently announced another dividend increase of 9.64% for 2022.

Estimated Earnings:

Comments:

Using the “Normal Multiple’ estimating tool from FASTgraphs, we see a blended P/E average over the last five years of 17.73. Based on Analysts’ forecasts two years out, you can expect an annualized return based on today’s price of 19.53% should IFC-T trade at its blended P/E.

Blended P/E is based upon a weighted average of the most recent actual value and the closest forecast value.

Another thing I like about Intact Financial Corp.’s earnings is that they are being revised upwards from both six months and three months ago for both 2022 and 2023. Analysts seem bullish on IFC-T in the short term.

Analyst Scorecard:

Comments:

Analyst estimates over the years are not very accurate based on one and two-year earnings projections. Analysts’ projections have hit or beat 33% of the time on one-year estimates and 45% on two-year estimates. This does not give us a lot of confidence on estimating the future with Intact Financial Corp.’s earnings. Monitoring quarterly earnings reports will give us a better idea on where things are headed.

Recent Earnings Report-Q3 2021:

Highlights

Net operating income per share of $2.87 driven by strong underwriting performance and an accretive contribution from RSA
Premiums grew 68%, reflecting the first full quarter of RSA in our results and continued strength in commercial lines
Combined ratio of 91.3%, driven by strength in all business segments despite an elevated 7.5 pts of catastrophe losses
OROE of 18.3% with a total capital margin of $2.7 billion
EPS of $1.60 reflects strong operating results tempered by an investment loss and integration costs
Quarterly dividend increased by 10% to $0.91 per common share

Charles Brindamour, Chief Executive Officer, said:

“The strength of our business was again evident this quarter, with robust operating performance across the platform, despite an elevated level of catastrophes. Our people have worked hard to get customers back on track following many severe weather events. We are making great progress on the integration of RSA, with synergies being realized as expected. The acquisition is already delivering high single-digit accretion to NOIPS since closing on June 1, and we remain on track to generate upper teens accretion within 36 months. With a strong and resilient balance sheet and momentum in all segments, we are increasing dividends to our common shareholders for the sixteenth consecutive year.”

UBS Keeps Buy Rating, $187 Target Price on Intact Financial, Ups EPS Estimates

01:22 PM EST, 11/30/2021 (MT Newswires) — UBS has kept its 12-month Buy rating and $187 TP on Intact Financial Corporation. 2021 EPS estimate goes to $11.42 from $10.11 to reflect stronger underlying results and distribution income, stronger RSA results, and a lower personal auto underlying loss ratio, partially offset by lower growth in personal auto. 2022 EPS estimate goes to $11.30 from $10.90 on stronger RSA results, partially offset by lower personal auto growth. 2023 estimate is also increasing to $12.91 from $12.44.

Summary:

Intact Financial Corp. appears to be sensibly priced based on historical metrics. Both its forecasted earnings growth and dividend growth appear to be trending along historical norms as well (~10%). Throw in a recent dividend increase (16 years and counting) and there is a lot to like about IFC-T. The company seems to be integrating its newest acquisition, RSA, quite well which will help improve the bottom line. Incrementally buying when the price gets below a 15 P/E has worked well over the last decade with this dividend grower.

Q3 2021 Earnings Calendar

Posted by JM on November 22, 2021

Earnings are in!

As part of our process, we monitor earnings releases to make sure our good dividend growers are continuing to grow their earnings and that management continues to provide positive guidance going forward. See full earnings calendar at the bottom of the post.

As expected, Q3 was another good quarter for the stocks on ‘The List’ with twenty one of our twenty-seven stocks meeting or exceeding Analyst expectations.

Beats:

Brookfield Infrastructure Partners (BIP-N) was our big winner again due to earnings contributions from a recent acquisition (Inter Pipeline) and the sale of a US district energy operation which closed in July.

Intact Financial (IFC-T) was also up significantly, exceeding estimates by over 50%. This was primarily due to the additional earnings provided by the RSA Insurance Group acquisition in June of this year.

“RSA contributed 8% accretion to Q3-2021 NOIPS, bringing accretion to 9% for the four-month period since closing. Given the overall strength of Intact’s results, immediate high single-digit accretion is evidence of the quality of the acquired portfolio. We have increased confidence in achieving our target of high single-digit accretion in the first 12 months and upper teens within 36 months of closing.”

Great to see our companies on ‘The List’ acquiring and integrating successfully. This bodes well for continued growth.

Dividend Increases:

A few of our dividend growers did exactly that, extending their dividend growth streaks and announcing dividend increases in Q3, getting a head start on 2022.

TFII-T from .23 to .27 up 17.4%
WCN-N from .205 to .23 up 12.2%
CTC-A-T from 1.175 to 1.3 up 10.6%
IFC-T from .83 to .91 up 9.64%
FTS-T from .505 to .535 up 5.94%
EMA-T from .6375 to .6625 up 3.92%
T-T from .3162 to .3274 up 3.54%

In the news:

Equitable Group Inc. (EQB-T) announces two for one split of its common shares this quarter. We sent out a tweet when this happened. We mentioned that we like stock splits for the simple reason they prove that there has been growth.

Another announcement of significance this quarter was the lifting of pandemic-related restrictions that prevented banks and insurers from raising dividends and buying back shares. We will be watching our bank stocks on ‘The List’ closely for dividend increases when they report Q4 earnings later this year.

Misses:

The stocks that surprised the most with significant earnings misses were MGA-N and SJ-T.

Magna International Inc. (MGA-N) missed expectations due to a sales decrease of 13% in Q3.

“Industry pressures intensified in the third quarter of 2021, resulting in a challenged operating environment. As a result of semiconductor chip shortages, our customers’ production schedules were unpredictable, causing labour and other operational inefficiencies at our facilities. Semiconductor chip shortages and related production disruptions are expected to continue into 2022, and the negative impacts continue to exceed our expectations from earlier this year. Our results were also negatively impacted by inflationary cost increases in production inputs including freight, labour and commodities.”

We will watch closely to see if the uncertainties above are transitory in nature or become longer term concerns.

Stella Jones Inc. (SJ-T) missed earnings expectations by 20%. Management attributes the miss to the volatility of lumber prices during the quarter which increased their costs in their utility pole and railway ties segments that outpaced any price adjustments. They also saw a softening of demand in their logs and lumber sales. Management remains confident in the near term that revenue and profitability will be up year over year and announced an acquisition during the quarter, Cahaba Pressure Treated Forest Products Inc.

“Based on current market conditions and assuming the conclusion of the acquisitions of Cahaba Pressure and Cahaba Timber, management is forecasting sales, EBITDA and EBITDA margin in 2022 to be comparable to the solid results expected in 2021. The Company anticipates that the robust demand for utility poles, the sustained railway ties maintenance demand and the contribution from the pending acquisitions will offset the normalization of residential lumber sales in 2022.”

We are always wary of earnings misses but management seems confident going into the fourth quarter and beyond. We will give them the benefit of the doubt for now.

Update:

Enghouse Systems Limited (ENGH-T) which we highlighted as an under-performer last quarter showed a slight uptick in fundamental performance. Revenue and EBITDA were up slightly over Q2 and management announced two acquisitions during the quarter. The business seems to be trending in the right direction for now. We will continue to monitor.

Summary:

For the most part the Analysts were close with their estimates, with the median ‘beat’ in the range of 2%. Compare this to last quarter (8%), and earnings estimates are getting a bit more predictable as we come out of the pandemic.

Here is ‘The List’ sorted by reporting date complete with the market’s consensus estimates and actual reported results.

COMPANY	DATE	ESTIMATE	RESULT
Bank of Nova Scotia	24-Aug	$1.90	$2.01
Royal Bank of Canada	25-Aug	$2.71	$3.00
TD Bank	26-Aug	$1.92	$1.96
Alimentation Couche-Tard Inc.	31-Aug	$0.65	$0.71
Dollarama Inc.	9-Sep	$0.49	$0.48
Enghouse Systems Limited	9-Sep	$0.39	$0.38
Canadian National Railway	19-Oct	$1.43	$1.52
Canadian Utilities Limited	27-Oct	$0.31	$0.33
Waste Connections	28-Oct	$0.85	$0.89
TFI International	29-Oct	$1.26	$1.46
Fortis	29-Oct	$0.64	$0.64
Equitable Group Inc.	3-Nov	$2.06	$2.07
Toromont Industries	3-Nov	$1.13	$1.13
Brookfield Infrastructure Partners	3-Nov	$0.13	$0.72
Franco Nevada	4-Nov	$0.85	$0.87
Telus	4-Nov	$0.28	$0.29
Enbridge Inc.	4-Nov	$0.57	$0.59
Bell Canada	4-Nov	$0.82	$0.82
Magna	4-Nov	$0.64	$0.56
Trans Canada	5-Nov	$0.99	$0.99
Stella-Jones Inc.	9-Nov	$0.65	$0.52
Intact Financial	10-Nov	$1.04	$1.60
CCL Industries	10-Nov	$0.87	$0.85
Algonquin Power & Utilities	10-Nov	$0.15	$0.15
Emera	11-Nov	$0.66	$0.68
Canadian Tire	11-Nov	$4.33	$4.20
Metro	17-Nov	$0.80	$0.81

‘The List’ – Portfolio Review (November 2021)

Posted by BM on November 15, 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 TC Energy Corp. (TRP-T).

Intro:

TC Energy Corp. is a vital part of everyday life – delivering the energy millions of people rely on to power their lives in a sustainable way. Thanks to a safe, reliable network of natural gas and crude oil pipelines, along with power generation and storage facilities, wherever life happens. Guided by the core values of safety, innovation, responsibility, collaboration and integrity, 7,500 people make a positive difference in the communities where they operate across Canada, the U.S. and Mexico.

TC Energy Corp., formerly TransCanada Corp, is an energy infrastructure company. The Company is engaged in the development and operation of North American energy infrastructure, including natural gas and liquids pipelines, power generation and natural gas storage facilities. Its segments include Canadian Natural Gas Pipelines, U.S. Natural Gas Pipelines, Mexico Natural Gas Pipelines, Liquids Pipelines and Energy. The Company operates in three businesses: Natural Gas Pipelines, Liquids Pipelines and Energy. The Natural Gas Pipelines and Liquids Pipelines segments principally consist of its respective natural gas and liquids pipelines in Canada, the United States and Mexico, as well as its regulated natural gas storage operations in the United States. The Energy segment includes its power operations and the non-regulated natural gas storage business in Canada.

Historical Graph:

Comments:

TC Energy Corp. is another of our good dividend growers that trades within a narrow valuation corridor. As you can see from the Blue Line on the graph (Normal P/E) and the Black Line (Price), there is typically very little variance (except for the large dips in 2018 and 2020). Investment opportunities occur when the Black Line falls below the Blue Line or below the Orange Line (15 PE) in a sell-off with this quality dividend grower. The fundamentals show a company whose earnings have grown steadily over the last ten years at an annualized rate of ~6%.

In the yield chart below, you will see a spike in the dividend yield above 6% last year when the price came under pressure. If you believed in ‘Dividend Yield Theory’ you would have been aggressively adding to your position last fall. The yield has come down a bit off its highs but is still trading well above its ten-year average of 4.3%.

Yield Chart:

Performance Graph:

Comments:

TC Energy Corp. has an annualized dividend growth rate of 7.3% over the last decade. With a yield on cost of 8.5% from an initial purchase a decade ago, investors now enjoy a healthy return from the dividend alone. Up until their Q3 Earnings announcement last week, investors of this quality company were expecting the trend of 7% dividend growth to continue. Management has now modified their dividend growth outlook to between 3-5% to help strengthen their Balance Sheet and have ‘dry powder’ to take advantage of opportunities when they arise.

Estimated Earnings:

Comments:

Using the “Normal Multiple’ estimating tool from FASTgraphs, we see a blended P/E average over the last five years of 16.84. Based on fifteen analysts’ forecasts two years out, you can expect an annualized return based on today’s price of 14.21% should TRP.TO trade at its blended P/E.

Blended P/E is based upon a weighted average of the most recent actual value and the closest forecast value.

Analyst Scorecard:

Comments:

Analyst estimates over the years are quite accurate based on one and two-year earnings projections. Analysts’ projections have hit or beat 83% of the time on one and two year estimates.

Recent Earnings Report-Q3 2021:

Third quarter 2021 financial results

Net income attributable to common shares of $779 million or $0.80 per common share
Comparable earnings of $1.0 billion or $0.99 per common share
Comparable EBITDA of $2.2 billion
Net cash provided by operations of $1.7 billion
Comparable funds generated from operations of $1.6 billion

Declared a quarterly dividend of $0.87 per common share for the quarter ending December 31, 2021

Continued to advance our $22 billion secured capital program by investing $1.7 billion in various growth projects

Began construction on the 2022 NGTL System Expansion Program

Continued to actively develop projects on our U.S. Natural Gas Pipeline network that will replace and upgrade certain facilities while reducing emissions including the US$0.8 billion WR project on ANR

Uncontested GTN rate settlement filed with FERC which would set new recourse rates for GTN effective January 1, 2022

Filed Columbia Gas rate settlement with FERC in October which includes continuation of its modernization program with approval expected in early 2022

Executed a 15-year Power Purchase Agreement (PPA) in September for 100 per cent of the power produced and the rights to all environmental attributes from the 297 MW Sharp Hills Wind Farm

Advanced the Bruce Power Unit 6 MCR program on budget and on schedule

Project 2030 launched by Bruce Power with the goal of achieving a site peak output of 7,000 MW by 2030 in support of climate change targets and future clean energy needs

Continued to develop a 1,000 MW pumped hydro storage project in Meaford, Ontario which is designed to provide emission-free electricity to the province while reducing greenhouse gas emissions

Signed a memorandum of understanding in August with Irving Oil to explore the joint development of a series of proposed energy projects focused on reducing greenhouse gas emissions and creating new economic opportunities in New Brunswick and Atlantic Canada

Partnered with Nikola Corporation in October to collaborate on developing, constructing, operating and owning large-scale hydrogen production facilities in the United States and Canada

Issued US$1.25 billion of 3-year and US$1.0 billion of 10-year fixed rate Senior Unsecured Notes in October

Released our 2021 Report on Sustainability in October which includes targets for our sustainability commitments, including reducing the emissions intensity from our operations 30 per cent by 2030 and positioning to achieve net zero emissions from our operations by 2050.

“During the first nine months of 2021, our diversified portfolio of essential energy infrastructure assets continued to perform very well and reliably meet North America’s growing demand for energy,” said François Poirier, TC Energy’s President and Chief Executive Officer.

“We are in the midst of an unprecedented period that is providing a significant number of investment opportunities driven by both the growing demand for energy and the transition to a cleaner energy future, added Poirier. We expect to sanction approximately $7 billion of new projects in 2021 with a risk-adjusted return profile that is consistent with previous investments and anticipate annual amounts of more than $5 billion will be added to our secured projects portfolio in each of the next several years. In order to judiciously fund our attractive suite of growth opportunities, maintain a strong financial position and enhance our already conservative, utility-like dividend payout ratios, we have modified our near-term dividend growth outlook,” continued Poirier. “We now expect to increase our common share dividend at an average annual rate of three to five per cent. While our previous outlook remains affordable and supported by the strong underlying performance of our business, we believe a modest change is prudent given our vast opportunity set. It will allow us to fund a larger portion of our future capital programs through internally generated cash flow, moderate our leverage and continue to deliver superior long-term total shareholder returns.”

Summary:

The market seems to have shaken off the ‘modified near-term dividend growth outlook’ announced last week. Analysts are mostly in agreement with management’s decision to strengthen their Balance Sheet and increase cash flow as opposed to paying out more dividends. Earnings are still projected to be in the traditional 7% range.

In the Magic Pants Wealth Builder (CDN) portfolio we added to our position in TC Energy incrementally last fall when the dividend yield was well above 6%. Once again, our process signaled that this was the time to buy even though the short-term narrative was negative surrounding the cancellation of the Keystone XL pipeline under a Biden administration. The pipeline was indeed cancelled but the stock has rebounded nicely from its December lows and we were able to purchase more income at a discounted price.

Quality companies find a way to overcome short-term setbacks. With no new pipelines being built in the foreseeable future and energy demand increasing, management sees the value of ‘pipe in the ground’ and is optimistic this will help increase margins. Combine that with new projects underway, higher cash flow and a disciplined management team, there is optimism that TC Energy will be able to transition to a cleaner energy future successfully. We will be monitoring our position closely.

As an investor looking for income there is a lot to like about TC Energy Corporation. A twenty-year dividend growth streak, an above average starting yield and currently, modest dividend growth at a sensible price.

Two Stocks from ‘The List’ Announce Double-Digit Dividend Increases

Posted by BM on October 29, 2021

Q3 Earnings season is upon us and the stocks on ‘The List’ continue their stellar performance in 2021.

Waste Connections posts higher Q3 results, lifts full year revenue outlook, raises dividend 12.2%.

05:43 AM EDT, 10/28/2021 (MT Newswires) — Waste Connections (WCN) on Wednesday reported adjusted Q3 net income of $0.89 per share, compared with $0.72 per share a year ago.

Analysts polled by Capital IQ were expecting $0.84 per share.

Revenue totaled $1.60 billion, up from $1.39 billion a year earlier. The consensus estimate was for $1.57 billion.

The waste management company said it now expects 2021 revenue of approximately $6.11 billion, up from its prior projection of $5.98 billion. It expects net income of approximately $633 million and adjusted EBITDA and approximately $1.91 billion, up from its earlier outlook of $1.88 billion.

Waste Connections also announced that the board approved a 12.2% increase in the quarterly dividend to $0.23 per share, payable on Nov. 23 to shareholders of record on Nov. 9.

TFI International reports Q3 adjusted EPS of US $1.46, Hikes dividend by 17%, Announces NCIB

04:38 PM EDT, 10/28/2021 (MT Newswires) — TFI International (TFII.TO) reported (in US$) Q3 2021 net income from continuing operations of $132.8 million, or $1.40 per diluted share, compared with $83.1 million, or $0.90 per diluted share, for the year ago quarter. Operating income from continuing operations grew 65% to $192.8 million from $117 million the prior year period, primarily driven by business acquisitions.

The company reported adjusted income of $138.9 million, or $1.46 per adjusted diluted share. TFI International had recorded adjusted income of $87.4 million or $0.94 per adjusted diluted share for Q3 2020.

Total revenue for the quarter was $2.1 billion, versus $936.1 million for the previous corresponding quarter, a 124% YoY increase. Net of fuel surcharge, total revenue was $1.87 billion, compared with $867 million for the prior year period.

The company said record Q3 results and strong profitability were driven by all four business segments.

The Board approved a $0.27 per share quarterly dividend, a 17% increase over the previous quarterly dividend of $0.23 per share, effective as of the next regular payment, in January.

The TSX has also approved the renewal of TFI International’s normal course issuer bid. TFI International may purchase a maximum of 7 million common shares, representing 7.96% of its public float. The NCIB runs from Nov 2 to Nov 1, next year. Under TFI International’s last NCIB, which expired on Oct 13, the company repurchased 1.15 million common shares at a volume weighted average purchase price of C$98.40 per share.

“During the third quarter, TFI International further built upon this year’s achievements with robust cash flow and strong performance across all business segments, many of which are already surpassing pre-pandemic performance despite ongoing macro disruptions,” stated Alain Bedard, Chairman, President and Chief Executive Officer. “I’m particularly pleased that our strong performance comes at a time when the most compelling benefits from our pivotal acquisition of UPS Freight are still ahead, and yet firmly within grasp as the newly branded TForce Freight continues to exceed expectations under the TFI umbrella.”

When I was still working, I used to listen to the news station on my drive to work every morning. I knew I was going to have a good day when the business update came on and one of my good dividend growers announced a dividend increase. Not only was I getting closer to my retirement goal of replacing my salary with dividend income, I knew that my capital would eventually grow as well.

Waste Connections and TFI International have been two of the three top performers on ‘The List’ in 2021 and they don’t appear to be slowing down based on their recent earnings releases. In our Magic Pants Wealth-Builder portfolio, we were fortunate to enter a position with TFII.TO in September 2020 when the P/E was 13 (today it is 31) unfortunately we never got an opportunity with WCN.TO. The stock price has been on fire since 2015.

CNR Executive Change Excites Investors

Posted by JM on October 20, 2021

Here is an excerpt from Canadian National Railway’s (CNR) recent quarterly earnings release October 19, 2021.

Earnings Report:

Q3 2021 Actual: 1.52
Q3 2021 Estimate: 1.43
Q4 2021 Estimate: 1.59

Canadian National Railway Company (CNR.TO) was up in Canada early Wednesday after the company on Tuesday said its third-quarter profit rose 71%, topping expectations, and announced the retirement of its chief executive.

The railway reported net income of C$1.69 billion in the period, or C$2.37 per share, up from C$985 million, or C$1.38, in the third quarter of 2020. Adjusted profit, which excludes most one-time items, rose 9.5% to C$1.08 billion, or C$1.52 per share, besting the consensus analyst estimate for the measure of a C$1.42 per share adjusted profit, according to Capital IQ.

Revenue rose 5.3% to C$3.59 billion “mainly due to freight rate increases, higher applicable fuel surcharge rates, and an increase in intermodal ancillary services”.

CN’s operating ratio, a closely watched efficiency measure for which lower is better, rose 1.8 percentage points to 62.7%, and down 0.9 percentage points to 59% on an adjusted basis.

The company, which is in the midst of a proxy battle with shareholders disgruntled by its failed US$33-billion bid for the Kansas City Southern (KSU) railroad, said chief executive J.J. Ruest will retire at the end of January and the company is launching a search for a replacement. Replacing Ruest was one of the goals of the disgruntled group.

It appears that any opportunity to purchase this good dividend grower at a sensible price have dwindled in the short term with the release of their Q3 earnings report and CEO change. Investors like the news and the price is now at an all-time high with an earnings yield of just 3.55%.

‘The List’ – Portfolio Review (October 2021)

Posted by BM on October 17, 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 Equitable Group Inc. (EQB-T).

Intro:

Equitable Group Inc. trades on the Toronto Stock Exchange (TSX: EQB and EQB.PR.C) and serves a growing number of Canadians through Equitable Bank, Canada’s Challenger Bank™. Equitable Bank has grown to become the country’s eighth largest independent Schedule I bank with a clear mandate to drive real change in Canadian banking to enrich people’s lives. Founded over 50 years ago, Equitable Bank provides diversified personal and commercial banking and through its EQ Bank platform has been named #1 Bank in Canada on the Forbes World’s Best Banks 2021 list. EQ Bank provides state-of-the-art digital banking services, like the Savings Plus Account that reimagines banking by offering an everyday high interest rate, plus the flexibility of a chequing account, as well as a wide range of smart banking solutions for Canadians, like fast international money transfers, US dollar accounts and a suite of registered products.

Historical Graph:

Comments:

Equitable Group is another of our good dividend growers that has traded within a narrow valuation corridor. As you can see from the Blue Line on the graph (Average P/E) and the Black Line (Price), there is typically very little variance (except for the large dip in 2020 due to COVID). Investment opportunities occur when the Black Line touches or falls below the Blue Line with this quality dividend grower. The fundamentals show a company whose earnings have grown steadily over the last ten years and are accelerating. The price reflects this with a higher-than-average P/E with a lower dividend yield (Red Line).

Performance Graph:

Comments:

Equitable Group Inc. has an excellent dividend growth rate (14%/year) over the last decade. A low starting yield takes a bit longer to produce an acceptable income level for retirees, but you can clearly see that EQB is gaining fast. With a starting yield of 1.8% ten years ago, you would now be receiving a return of 5.9% on your original investment from dividends alone.

EQB is also one of the stocks we like as dividend growth investors that aligns dividend growth closely with price growth (~16% CAGR of capital over the past decade).

Note: The dividend rate was unchanged from 2020 reflecting regulatory guidance from OSFI to all federally regulated banks. The Bank intends to resume its previously announced dividend increases once regulatory restrictions are lifted.

Estimated Earnings:

Comments:

We are going to use a different way of forecasting for EQB than we have used for some of the other stocks we have analyzed. The reason is that EQB has been accelerating its earnings growth over the last few years and the historical P/E is becoming less relevant. In this example we use the ‘3-5Y TL Growth’ or Trend Line Growth. With a historical 13% earnings growth rate over this period we can see that the stock should be valued at a higher multiple (P/E).

EQB’s ‘Blended P/E’ is 11.29. Blended P/E is based upon a weighted average of the most recent actual value and the closest forecast value. It appears that EQB will demand a higher multiple going forward from the market which makes the price today a sensible entry point using this forecasting methodology.

Analyst Scorecard:

Comments:

Analyst estimates over the years are quite accurate based on one and two-year earnings projections. Analysts projections have hit or beat 100% of the time on one and two year estimates.

Recent Earnings Report-Q2 2021:

Q2 Net Earnings $70.8 million, +$18.3 million or +35% from 2020

Q2 diluted EPS $4.05, +33% from Q2 2020

ROE 16.5% with $100 million in Excess Capital

Q2 ROE towards high end of 15-17% target, and 1.8% better than 14.7% in Q2 2020
CET1 14.4% vs. mid-point target of 13.5%, or excess capital of nearly $6 per share
Efficiency remaining in target range of 39-41% at 40.9% in Q2 and 39.6% YTD

Book Value Surpasses $100 per share

Book value +20% y/y to $101.94 per share and +$4.08 or +4% from Q1 2021

Customers and Digital – Growing & Deepening

Now serving nearly 300,000 Canadians, with EQ Bank digital customers +79% y/y to 222,000 and deposits +99% y/y to over $6.5 billion
Digital transactions +101% y/y, average products per customer +44%, customer lifetime value more than 10 times higher than account acquisition costs

Conventional Lending Driving Asset Growth

Loans under management +9% y/y to $35.4 billion
Single family alternative loan originations +200% y/y to $1.8 billion, reverse mortgage originations +318% y/y to $45 million, and Commercial loan originations +16% y/y to $0.7 billion

“Earlier this year, we significantly upgraded our growth forecast and in so doing, challenged ourselves to do more for customers, partners, and shareholders. Through Q2, Equitable delivered to this guidance. On the strength of great execution by our team and meaningful innovations in our challenger bank services, each area of the Bank registered growth. EQ Bank deposits grew 99% over 2020 to a record $6.5 billion, an indication that digital services like our new US Dollar Account are driving the kind of change that enriches the lives of our customers. This past quarter was also an excellent illustration of how we’re positioning to drive future earnings, with double-digit loan origination growth reflecting strong contributions from alternative single family, reverse mortgages, Cash Surrender Value lines of credit and conventional commercial loans where Equitable stands out for responsive service, effective underwriting, and risk management. For shareholders, Q2 featured record earnings, high ROE, and an industry best efficiency ratio, even as we purposely drive higher investment to seed future growth. With the tailwinds of an improving economy and the positive impact of service expansions, Equitable is in a great position to realize its objectives this year and beyond, on behalf of almost 300,000 customers, our valued shareholders, and business partners,” said Andrew Moor, President and Chief Executive Officer.

Summary:

Equitable Group Inc. (EQB) checks a lot of the boxes that dividend growth investors look for in a quality candidate; above average dividend and price growth over the last decade, low payout ratio with estimated double-digit growth ahead. Throw in a 2:1 stock split recently announced (Oct. 5) and you have a compelling case for an investment.

The only caveat is that EQB is not covered by any of the third-party services we subscribe to, so it is hard to get a complete read on the ‘quality’ of this business. The market cap (~2.7B) is a little lower than we would like to see for a core position.

Retirees may not find today’s starting yield appealing but investors with a longer-term horizon may want to consider adding a smaller position to their low yield/high growth category.

Category: Uncategorized

‘The List’ – Portfolio Review (March 2022)

‘The List’ – Portfolio Review (February 2022)

‘The List’ – Portfolio Review (January 2022)

Q4 2021 Earnings Calendar-Intro

‘The List’ – Portfolio Review (December 2021)

Q3 2021 Earnings Calendar

‘The List’ – Portfolio Review (November 2021)

Two Stocks from ‘The List’ Announce Double-Digit Dividend Increases

CNR Executive Change Excites Investors

‘The List’ – Portfolio Review (October 2021)

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