Last updated by BM on July 2, 2024
Summary
This is a weekly installment of our MP Market Review series, which provides updates on the financial markets and Canadian dividend growth companies we monitor on ‘The List’.
- How to ‘Bondify’ your DGI Portfolio in this week’s newsletter.
- Last week, dividend growth of ‘The List’ stayed the course and has increased by +8.8% YTD (income).
- Last week, the price of ‘The List’ was up with a return of +3.9% YTD (capital).
- Last week, there were no dividend announcements from companies on ‘The List’.
- Last week, there was an earnings report from a company on ‘The List’.
- This week, no companies on ‘The List’ are due to report earnings.
DGI Clipboard
“You want to start your dividend growth retirement portfolio as early as you can so that, come retirement, more of your portfolio is ‘bondified’. That way, most of your retirement portfolio is free from market risk. Bondified, to me, means the distance between your purchase price and the current price is really large.”
– Tom Connolly
‘Bondify’ your DGI Portfolio by Selecting Quality Companies at Sensible Prices
Not every stock on ‘The List’ ends up in our dividend growth investing (DGI) portfolio. ‘The List’ is a teaching tool that screens for candidates based on a set criterion across the universe of dividend growth stocks in Canada. To end up in our portfolio a candidate would need to score high on ‘quality’ using our many quality indicators. Then and only then would we look at valuation.
Despite the superior quality of our dividend growers, we exercise caution and do not initiate or augment a position unless the stock is ‘sensibly priced.’ Here are the four methods we use to assess valuation.
- Historical Fundamentals
- Dividend Yield Theory
- CAPE Ratio
- Graham Value
In today’s post we will review the ‘historical fundamentals’ method of arriving at a sensible price using Fortis Inc. (FTS-T), one of the highest quality candidates on ‘The List’.
Historical Fundamentals
A company’s operating results will determine its stock price in the long run. Analyzing a company’s historical fundamentals provides insight into how the business has been valued over an extended period. Many of the stocks we invest in have a ‘narrow valuation corridor,’ meaning the stock price follows a path that rarely deviates from its historical trading range. A company’s P/E (Price to Adjusted Operating Earnings), OCF (Price to Operating Cash Flow), EBITDA (Price to Earnings Before Interest, Taxes, and Amortization), and Sales (Price to Sales) ranges tell us a lot about how a company has been traditionally valued.
Purchasing at the bottom of these ranges or selling at the top has helped us manage our entry and exit points to enhance returns.
We use the Fundamental Analyzer Software Tool (FASTgraphs) to visualize how a company has been historically valued. We like to see it trading within its typical ‘valuation corridor’ based on a ten-to-twelve-year timeline. This gives us a clearer picture of how the stock has traded in different economic cycles.
FASTgraphs – “FG”
The following colours/lines on the “FG” chart shown below represent:
- Black line: Price
- White line: Dividend
- Orange line: Graham average of usually 15 P/E (price/earnings) for most stocks
- Blue line: Normal P/E
- Dashed or dotted lines: Estimates only
- Green area: Earnings
Source: FASTgraphs
Having the luxury of viewing several fundamental metrics in one graphic certainly helps to assess a company’s current valuation quickly and look for any patterns. Selecting a trading cycle of at least a decade also helps eliminate any short-term bias. It gives a pretty good idea of how a company reacts to recessionary and volatile market periods.
Fortis Inc.’s price (black line) is surprisingly stable throughout all periods and closely tracks its average price-to-earnings ratio (blue line). We also quickly notice that both the earnings (green area) and dividends (white line) have increased at about the same rate over the last decade, indicating that management has been careful not to overextend themselves when paying out dividends.
Regarding entry and exit points, it doesn’t get more straightforward than Fortis Inc. Buying when the price dips are at or below the average P/E (blue line) and selling when it rises well above provides a high probability of a successful trading outcome. Alternatively, holding and adding to your position when the price falls below the average P/E (blue line) would have generated a growing income stream far beyond what any bond or GIC could have provided. A price (black line) that has also risen proportionately ensures that your initial investment is only becoming safer (from the market) as time passes. This is why one of my mentors, Tom Connolly, likes to call companies like Fortis Inc. ‘bondified.’
To top it off, Fortis Inc. has been paying a growing dividend for over 50 consecutive years!
We originally purchased Fortis Inc. for our model portfolio in November last year. With an above-average starting yield and another 4-6% dividend increase likely to be announced in September, the valuation, based on ‘historical fundamentals’, is again becoming compelling.
DGI Scorecard
The List (2024)
The Magic Pants 2024 list includes 28 Canadian dividend growth stocks. Here are the criteria to be considered a candidate on ‘The List’:
- Dividend growth streak: 10 years or more.
- Market cap: Minimum one billion dollars.
- Diversification: Limit of five companies per sector, preferably two per industry.
- Cyclicality: Exclude REITs and pure-play energy companies due to high cyclicality.
Based on these criteria, companies are added or removed from ‘The List’ annually on January 1. Prices and dividends are updated weekly.
While ‘The List’ is not a standalone portfolio, it functions admirably as an initial guide for those seeking to broaden their investment portfolio and attain superior returns in the Canadian stock market. Our newsletter provides readers with a comprehensive insight into the implementation and advantages of our Canadian dividend growth investing strategy. This evidence-based, unbiased approach empowers DIY investors to outperform both actively managed dividend funds and passively managed indexes and dividend ETFs over longer-term horizons.
For those interested in something more, please upgrade to a paid subscriber; you get the enhanced weekly newsletter, access to premium content, full privileges on the new Substack website magicpants.substack.com and DGI alerts whenever we make stock transactions in our model portfolio.
Performance of ‘The List’
Last week, dividend growth of ‘The List’ stayed the course and has now increased by +8.8% YTD (income).
Last week, the price return of ‘The List’ was up with a return of +3.9% YTD (capital).
Even though prices may fluctuate, the dependable growth in our income does not. Stay the course. You will be happy you did.
Last week’s best performers on ‘The List’ were TFI International (TFII-N), up +6.08%; Stella-Jones Inc. (SJ-T), up +3.85%; and Manulife Financial (MFC-T), up +3.58%.
Telus (T-T) was the worst performer last week, down -4.08%.
| SYMBOL | COMPANY | YLD | PRICE | YTD % | DIV | YTD % | STREAK |
|---|---|---|---|---|---|---|---|
| ATD-T | Alimentation Couche-Tard Inc. | 0.9% | $76.77 | 0.0% | $0.70 | 17.4% | 14 |
| BCE-T | Bell Canada | 9.0% | $44.31 | -18.2% | $3.99 | 3.1% | 15 |
| BIP-N | Brookfield Infrastructure Partners | 5.9% | $27.44 | -10.6% | $1.62 | 5.9% | 16 |
| CCL-B-T | CCL Industries Inc. | 1.6% | $71.94 | 24.4% | $1.16 | 9.4% | 22 |
| CNR-T | Canadian National Railway | 2.1% | $161.66 | -3.1% | $3.38 | 7.0% | 28 |
| CTC-A-T | Canadian Tire | 5.2% | $135.74 | -2.1% | $7.00 | 1.4% | 13 |
| CU-T | Canadian Utilities Limited | 6.1% | $29.55 | -8.0% | $1.81 | 0.9% | 52 |
| DOL-T | Dollarama Inc. | 0.3% | $124.91 | 31.5% | $0.35 | 29.5% | 13 |
| EMA-T | Emera | 6.3% | $45.65 | -10.1% | $2.87 | 3.0% | 17 |
| ENB-T | Enbridge Inc. | 7.5% | $48.67 | 0.6% | $3.66 | 3.1% | 28 |
| ENGH-T | Enghouse Systems Limited | 3.3% | $30.17 | -11.2% | $1.00 | 18.3% | 17 |
| FNV-N | Franco Nevada | 1.2% | $118.52 | 7.6% | $1.44 | 5.9% | 16 |
| FTS-T | Fortis Inc. | 4.4% | $53.17 | -3.1% | $2.36 | 3.3% | 50 |
| IFC-T | Intact Financial | 2.1% | $228.01 | 12.1% | $4.84 | 10.0% | 19 |
| L-T | Loblaw Companies Limited | 1.2% | $158.70 | 23.5% | $1.92 | 10.0% | 12 |
| MFC-T | Manulife Financial | 4.4% | $36.43 | 26.1% | $1.60 | 9.6% | 10 |
| MGA-N | Magna | 4.5% | $41.90 | -24.5% | $1.90 | 3.3% | 14 |
| MRU-T | Metro Inc. | 1.8% | $75.79 | 10.6% | $1.34 | 10.7% | 29 |
| RY-T | Royal Bank of Canada | 3.9% | $145.65 | 9.5% | $5.72 | 7.1% | 13 |
| SJ-T | Stella-Jones Inc. | 1.3% | $89.27 | 16.5% | $1.12 | 21.7% | 19 |
| STN-T | Stantec Inc. | 0.7% | $114.53 | 9.4% | $0.83 | 7.8% | 12 |
| T-T | Telus | 7.4% | $20.71 | -12.7% | $1.53 | 7.1% | 20 |
| TD-T | TD Bank | 5.4% | $75.20 | -11.2% | $4.08 | 6.3% | 13 |
| TFII-N | TFI International | 1.1% | $145.16 | 10.6% | $1.60 | 10.3% | 13 |
| TIH-T | Toromont Industries | 1.6% | $121.13 | 7.4% | $1.92 | 11.6% | 34 |
| TRI-N | Thomson Reuters | 1.3% | $168.57 | 17.6% | $2.16 | 10.2% | 30 |
| TRP-T | TC Energy Corp. | 7.4% | $51.86 | -0.9% | $3.84 | 3.2% | 23 |
| WCN-N | Waste Connections | 0.7% | $175.36 | 18.4% | $1.14 | 8.6% | 14 |
| Averages | 3.5% | 3.9% | 8.8% | 21 |
Note: Stocks ending in “-N” declare earnings and dividends in US dollars. To achieve currency consistency between dividends and share price for these stocks, we have shown dividends in US dollars and share price in US dollars (these stocks are listed on a US exchange). The dividends for their Canadian counterparts (-T) would be converted into CDN dollars and would fluctuate with the exchange rate.
Check us out on magicpants.substack.com for more info in this week’s issue….
