Last updated by BM on March 06, 2023
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’.
- Last week, ‘The List’ was up slightly with a YTD price return of +5.4% (capital), while its dividend growth remained the same at +6.2% YTD, highlighting growth in income over the past year.
- Last week, there were no dividend increases from companies on ‘The List’.
- Last week, there were three earnings reports from companies on ‘The List’.
- Two companies on ‘The List’ are due to report earnings this week.
- If you’re interested in creating your own income portfolio, consider subscribing to our premium service, which grants you access to the MP Wealth-Builder Model Portfolio (CDN) and exclusive subscriber-only content. Learn More
Introduction
“You have a pair of pants. In the left pocket, you have a $100. You take $1 out of the left pocket and put in the right pocket. You now have a $101. There is no diminution of dollars in your left pocket. That is one magic pair of pants.”
This ‘magic pants’ analogy was from a Seeking Alpha article on dividend investing I read about a decade ago and was one of the catalysts for me to take a closer look at this type of investing and see if it truly was magical.
After conducting additional research, I have shifted towards utilizing a dividend growth investing (DGI) strategy as my primary investment approach. While I maintain portfolios consisting of high-quality dividend growers from both the United States and Canada, I have opted to concentrate on Canadian (CDN) dividend growth companies in this blog. This is due to several reasons, including a smaller pool of DGI companies to track, a lack of coverage for the DGI strategy by Canadian investment media, and a tendency for those who do cover DGI to narrowly focus on only a handful of sectors (Energy and Financials).
While ‘The List’ is not a portfolio in itself, it serves as an excellent initial reference for individuals seeking to diversify their investments and attain higher returns in the Canadian stock market. Through our blog, we provide weekly updates on ‘The List’ and offer valuable perspectives and real-life examples of the dividend growth investing strategy in practice. This helps readers gain a deeper understanding of how to implement and benefit from this investment approach.
DGI Thoughts
“Charlie and I are not stock-pickers; we are business pickers.”
– Warren Buffett, Berkshire Hathaway Inc. Annual Report (2022)
I always enjoy reading the Berkshire Hathaway Inc. Annual Report. Great insight from one of the greatest investors of our era. As it turns out, there are a few tidbits of wisdom for dividend growth investors in this year’s report. More on Berkshire Hathaway Inc. and its Annual Report in the ‘Recent News’ portion of this week’s review.
Like Buffett, we are business- pickers, and we like quality businesses. One of the best ways we have found to ‘pick’ a quality dividend growth business is to look at its historical and estimated ‘Growth Yield’ or ‘Yield on Cost’. Here is a chart for you to see at a glance what it takes to get to a 7% return (on dividends alone) within ten years.
Source: magicpants.ca
The table illustrates the possible outcomes of combining initial yields (shown across the top) and annual growth rates (displayed on the left side) to attain the target. Whenever two values meet, the table indicates the number of years needed to achieve a 7% income return from dividends alone. The shaded cells represent those combinations that take 10 years or less to hit the target.
To illustrate, a 3% initial yield that grows at a rate of 9% per year, as well as a 4% initial yield that increases at 6% annually, both result in a 7% ‘Growth Yield’ within a decade, making them both viable combinations.
The 7×10 table focuses solely on income and disregards the influence of price hikes. It also doesn’t account for the compounding effect of reinvesting dividends, which would have reduced the shown timelines. The table only displays the rise in ‘Growth Yield’ due to the growth in the dividend.
As a part of our selection process, we use ‘Growth Yield’ as a quality indicator. Although not mandatory for all businesses in your portfolio to fulfill the 7×10 criterion, our past experience has demonstrated that a considerable number of businesses that meet this metric are likely to achieve market-beating returns.
For more info on ‘Growth Yield’, see one of our top posts: Using Growth Yield (YOC) To Build Powerful DGI Portfolios
Recent News
Berkshire Hathaway Annual Report (2022) https://www.berkshirehathaway.com/2022ar/2022ar.pdf
In reading this year’s annual report, I noticed a few comments from Buffett that were worth pointing out to dividend growth investors.
In the ‘Secret Sauce’ section of the report, Buffett mentions two of his long-term holdings, Coca-Cola and American Express, and laments on how much their dividends and capital have grown in thirty years compared to a comparable fixed income investment of a 30-year bond with a fixed rate of return.
“The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million.Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow.
American Express is much the same story. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase.
These dividend gains, though pleasing, are far from spectacular. But they bring with them important gains in stock prices.
Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.”
Buffett agrees with how dependable dividend growth can be from a quality company and that a rising dividend income stream will eventually lead to rising stock prices.
In the report, we also gained some understanding of Buffett’s investment timeline, in which he expressed, “At Berkshire, there will be no finish line.”
Frequently, we become fixated on our retirement plans and the specific time when we will retire, causing us to make unfavourable investment choices. Patrick Keogh explores this issue in his book, Make Your Family Rich. Keogh views dividend growth investing as a method of succession planning for a company (the Keogh Family Office), and he regards it as more of a process than a destination. Thinking of what we do as dividend growth investors in the same way a company plans for succession allows us to lengthen our investing timeline and let our process play out.
Selecting high-quality companies, recognizing that increasing dividends results in increasing stock prices, and having a long-term perspective that extends indefinitely – these are the shared principles of both dividend growth investors and one of the most exceptional investors of our era.
What if interest rates stay high for a few years? (Globe & Mail)
“What would you do if inflation and interest rates remained high, not just for the rest of this year, but for a few years to come?”
The author provides analysis and logic as to why we still have a long way to go before interest rates begin to decline. Preparing for this probable outcome would be prudent.
The List (2023)
Last updated by BM on March 03, 2023
The Magic Pants List contains 27 Canadian dividend growth stocks. ‘The List’ contains Canadian companies that have raised their dividend yearly for at least the last ten years and have a market cap of over a billion dollars. Provided below is each stock’s symbol, name, current yield, current price, price return year-to-date, current dividend, dividend growth year-to-date and current dividend growth streak. Companies on ‘The List’ are added or subtracted once a year, on January 1. After that, ‘The List’ is set for the next twelve months. Prices and dividends are updated weekly.
| SYMBOL | COMPANY | YLD | PRICE | YTD % | DIV | YTD % | STREAK |
|---|---|---|---|---|---|---|---|
| AQN-N | Algonquin Power & Utilities | 6.5% | $7.82 | 16.2% | $0.51 | -29.0% | 12 |
| ATD-T | Alimentation Couche-Tard Inc. | 0.9% | $65.30 | 8.6% | $0.56 | 19.1% | 13 |
| BCE-T | Bell Canada | 6.3% | $60.50 | 0.4% | $3.82 | 5.0% | 14 |
| BIP-N | Brookfield Infrastructure Partners | 4.4% | $32.95 | 5.2% | $1.44 | 6.3% | 15 |
| CCL-B-T | CCL Industries | 1.6% | $65.37 | 12.6% | $1.06 | 10.4% | 21 |
| CNR-T | Canadian National Railway | 1.9% | $162.17 | -0.4% | $3.16 | 7.8% | 27 |
| CTC-A-T | Canadian Tire | 4.0% | $170.80 | 16.5% | $6.90 | 17.9% | 12 |
| CU-T | Canadian Utilities Limited | 5.1% | $35.13 | -4.9% | $1.79 | 1.0% | 51 |
| DOL-T | Dollarama Inc. | 0.3% | $76.95 | -3.6% | $0.22 | 2.3% | 12 |
| EMA-T | Emera | 5.1% | $53.82 | 2.3% | $2.76 | 3.0% | 16 |
| ENB-T | Enbridge Inc. | 6.7% | $52.83 | -0.9% | $3.55 | 3.2% | 27 |
| ENGH-T | Enghouse Systems Limited | 1.7% | $43.40 | 21.5% | $0.74 | 3.5% | 16 |
| FNV-N | Franco Nevada | 1.0% | $136.78 | -1.0% | $1.36 | 6.3% | 15 |
| FTS-T | Fortis | 4.1% | $54.50 | -1.5% | $2.26 | 4.1% | 49 |
| IFC-T | Intact Financial | 2.3% | $195.54 | -0.1% | $4.40 | 10.0% | 18 |
| L-T | Loblaws | 1.4% | $116.80 | -2.9% | $1.62 | 5.2% | 11 |
| MGA-N | Magna | 3.2% | $57.09 | -0.7% | $1.84 | 2.2% | 13 |
| MRU-T | Metro | 1.7% | $70.24 | -6.9% | $1.21 | 10.0% | 28 |
| RY-T | Royal Bank of Canada | 3.9% | $136.75 | 6.8% | $5.28 | 6.5% | 12 |
| SJ-T | Stella-Jones Inc. | 1.6% | $50.77 | 2.4% | $0.80 | 0.0% | 18 |
| STN-T | Stantec Inc. | 1.0% | $79.82 | 22.2% | $0.77 | 8.5% | 11 |
| TD-T | TD Bank | 4.3% | $89.05 | 1.6% | $3.84 | 7.9% | 12 |
| TFII-N | TFI International | 1.1% | $125.59 | 25.4% | $1.40 | 29.6% | 12 |
| TIH-T | Toromont Industries | 1.5% | $113.21 | 15.9% | $1.68 | 10.5% | 33 |
| TRP-T | TC Energy Corp. | 6.6% | $56.18 | 5.4% | $3.69 | 3.4% | 22 |
| T-T | Telus | 5.1% | $27.31 | 3.8% | $1.40 | 5.4% | 19 |
| WCN-N | Waste Connections | 0.8% | $134.14 | 1.8% | $1.02 | 7.9% | 13 |
| Averages | 3.1% | 5.4% | 6.2% | 19 |
Six Canadian stocks on ‘The List’ declare earnings and dividends in US dollars and are inter-listed on a US exchange in US dollars. The simplest way to display dividend and price metrics for these stocks is to show their US exchange symbols along with their US dividends and price. The stocks I am referring to have a -N at the end of their symbols. You can still buy their Canadian counterparts (-T), but your dividends will be converted into CDN dollars and will fluctuate based on the exchange rate.
Note: When the currency of the dividend and share price match, the calculation is straightforward. But it’s not so simple when the dividend is declared in one currency and the share price is quoted in another. Dividing the former by the latter would produce a meaningless result because it’s a case of apples and oranges. To calculate the yield properly, you would need to express the dividend and share price in the same currency.
Performance of ‘The List’
Feel free to click on this link, ‘The List’ for a sortable version from our website.
Last week, ‘The List’ was up slightly with a YTD price return of +5.4% (capital), while its dividend growth remained the same at +6.2% YTD, highlighting growth in income over the past year.
The best performers last week on ‘The List’ were Franco Nevada (FNV-N), up +9.19%; Stella-Jones Inc. (SJ-T), up +6.77%; and Magna (MGA-N), up +6.12%.
Canadian Utilities Limited (CU-T) was the worst performer last week, down -3.25%.
Dividend Increases
“The growth of dividend paying ability is of significance in the determination of a stock’s quality, or general safety…”
– Arnold Bernhard (the founder of Value Line)
“As a dividend increase is a positive sign of a company’s financial strength, the safest purchase, after research, is a stock with a recent dividend increase.”
– Tom Connolly (the founder of dividendgrowth.ca)
Last week, there were no dividend increases from companies on ‘The List’.
Earnings Releases
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 2022 is just about over and we are now seeing the beginning of the next earnings season with a couple of banks reporting this week.
The updated earnings calendar can be found here.
Earnings growth and dividend growth tend to go hand in hand, so this information can tell us a lot about the 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.
Two companies on ‘The List’ is due to report earnings this week.
Stella-Jones Inc. (SJ-T) will release its fourth-quarter 2022 results on Wednesday, March 8, 2023, before markets open.
Enghouse Systems Limited (ENGH-T) will release its first-quarter 2023 results on Thursday, March 9, 2023, after markets close.
Last week, three companies on ‘The List’, reported their earnings.
Royal Bank of Canada (RY-T) released its first-quarter 2023 results on Wednesday, March 1, 2023, before markets opened.
“In a complex and uncertain world, RBC is relentlessly focused on bringing leadership, stability and advice to our clients and communities. As our first quarter results demonstrate, we are prudently managing risk while delivering strong revenue growth driven by our diversified business model. Looking ahead, RBC’s premium businesses, robust balance sheet and strategic advantages will allow us to continue transforming our bank for the future and creating value for our clients, communities and shareholders.”
– President and Chief Executive Officer, Dave McKay
Highlights:
Q1 2023 vs. Q1 2022
- Net income of $3,214 million was down $881 million or 22% from a year ago.
- Diluted EPS of $2.29 was down $0.55 or 19% and ROE of 12.6% was down from 17.3% last year.
- Our CET1 ratio of 12.7% was down 80 bps from a year ago.
- Excluding the specified item for the impact of the CRD and other tax related adjustments as described below, net income of $4,264 million was up $169 million or 4% from a year ago.
- Excluding the specified item, diluted EPS of $3.05 was up $0.21 or 7% and ROE of 16.8% was down from 17.3% last year.
- Our earnings were down from last year, primarily driven by the specified item, which is reported in Corporate Support.
- Excluding the impact of the specified item, net income increased from last year driven by higher earnings in Personal & Commercial Banking, Capital Markets and Wealth Management, partially offset by lower results in Insurance.
Q1 2023 vs. Q4 2022
- Net income of $3,214 million was down $668 million or 17% from last quarter.
- Diluted EPS of $2.29 was down $0.45 or 16% and ROE of 12.6% down from 15.6% in the prior quarter.
- Our CET1 ratio of 12.7% was up 10 bps from last quarter.
- Excluding the specified item, net income of $4,264 million was up $382 million or 10% from last quarter.
- Excluding the specified item, diluted EPS of $3.05 was up $0.31 or 11% and ROE of 16.8% was up from 15.6% last quarter.
- Our earnings were down from last quarter, primarily driven by the specified item, which is reported in Corporate Support.
- Excluding the impact of the specified item, net income increased from last quarter driven by higher earnings in Capital Markets and Wealth Management, partially offset by lower results in Insurance and Personal & Commercial Banking.
Outlook:
Unemployment remains very low across most advanced economies with labour shortages limiting further increases in production and pushing wages higher. However, we expect unemployment rates will rise as higher interest rates and elevated inflation add to growth headwinds. Global inflation pressures have eased with the price of key commodities and shipping costs declining from peak levels in calendar 2022 and the breadth of inflation pressures across goods and services has shown signs of narrowing. Most advanced economy central banks are likely at or close to the end of interest rate increases. However, the lagged impact of aggressive increases in interest rates in calendar 2022 will continue to increase household and business borrowing costs in calendar 2023. The U.S., Canadian, and U.K. economies are expected to undergo moderate recessions in calendar 2023. GDP in the Euro area is expected to grow but at a slow pace in calendar 2023 with higher interest rates adding to inflation and disruptions from the war in Ukraine.
Source: (RY-T) Q1-2023 Earnings Release
TD Bank (TD-T) released its first-quarter 2023 results on Thursday, March 2, 2023, before markets opened.
“TD had a strong start to 2023 with Canadian and U.S. retail businesses delivering robust revenue growth and record earnings, demonstrating the benefits of our diversified business mix,” said Bharat Masrani, Group President and Chief Executive Officer, TD Bank Group. “We continued to invest to strengthen our businesses and deliver the legendary customer experiences our customers and clients have come to expect from TD.” “Yesterday, we announced the close of the Cowen Inc. acquisition, an important step forward in the expansion of our global dealer. TD Securities now has 6,500 colleagues in 40 cities around the world and is able to serve clients with an even broader product and services offering,” added Masrani.
– Bharat Masrani, Group President and Chief Executive Officer
Highlights:
Q1 2023 vs. Q1 2022
- Reported diluted earnings per share were $0.82, compared with $2.02.
- Adjusted diluted earnings per share were $2.23, compared with $2.08.
- Reported net income was $1,582 million, compared with $3,733 million.
- Adjusted net income was $4,155 million, compared with $3,833 million.
Acquisition of Cowen Inc.
On March 1, 2023, the Bank completed the acquisition of Cowen Inc. (“Cowen”). The results of the acquired business will be consolidated by the Bank from the closing date and primarily reported in the Wholesale Banking segment.
Outlook:
Pending Acquisition of First Horizon Corporation
On February 9, 2023, the parties announced they had mutually agreed to extend the outside date to May 27, 2023, in accordance with the terms of the merger agreement. The closing of the transaction is subject to customary closing conditions, including approvals from U.S. and Canadian regulatory authorities, which now are not expected to be obtained prior to May 27, 2023. Regulatory approvals are not within the Bank’s control. If the merger does not close by May 27, 2023, then an amendment to the merger agreement would be required to further extend the outside date. TD and First Horizon are discussing a potential further extension.
Source: (TD-T) Q1-2023 Earnings Release
Canadian Utilities Limited (CU-T) released its fourth-quarter 2022 results on Thursday, March 2, 2023, before markets opened.
“First of all, 2022 saw us deliver on significant year-over-year earnings growth. Our Alberta distribution utilities unlocked significant efficiencies that will in turn create meaningful savings for customers going forward. It was also another successful year of operations for our LUMA Energy business, with numerous achievements in the support of the Company’s commitment of rebuilding and modernizing the electricity transmission and distribution system in Puerto Rico.
These successes ultimately cumulated into the extension of LUMA’s supplemental operating agreement, allowing critical work the team is doing for the people of Puerto Rico to continue. We’ve also made significant strides in the execution of our energy transition strategy with the completed acquisition of a major renewable generation portfolio and related development pipeline. While continuing to advance a number of our other ongoing energy transition investments, including our Alberta based solar initiatives and our ongoing hydrogen initiatives in the Alberta heartland.”
– Brian Shkrobot, Executive Vice President and Chief Financial Officer
Highlights:
- Adjusted earnings in 2022 of $655 million ($2.43 per share), which were $69 million ($0.26 per share) higher compared to $586 million ($2.17 per share) in 2021.
- Fourth quarter adjusted earnings in 2022 of $180 million ($0.66 per share) were $12 million ($0.05 per share) lower compared to $192 million ($0.71 per share) in the fourth quarter of 2021.
- Invested $452 million in capital expenditures in the fourth quarter of 2022, of which 85 per cent was invested in regulated utilities and 15 per cent mainly in Energy Infrastructure.
- Subsequent to year-end, on January 3, 2023, Canadian Utilities closed the previously announced acquisition of a portfolio of wind and solar assets and development projects located in Alberta and Ontario from Suncor Energy Inc. Concurrent with the close of this acquisition, Canadian Utilities entered into a new 15-year renewable energy purchase agreement with Microsoft Corporation. Under the terms of the agreement, Microsoft will purchase 150-MW per year of renewable energy generated by the Forty Mile Wind Phase 1 Project in Alberta, acquired as part of the acquisition from Suncor.
- In December 2022, The Yukon Electrical Company Limited, a subsidiary of Canadian Utilities, and Copper Niisüü Limited Partnership (CNLP), finalized a landmark Electricity Purchase Agreement to underpin the Saa Sè Energy Project in Beaver Creek and enhance energy autonomy for White River First Nation. Under the terms of the agreement, CNLP will build, own and operate the Beaver Creek solar facility. Upon completion, Canadian Utilities will purchase the solar electricity generated, connect it to the grid and redistribute it back to the community. The facility is expected to be fully operational by 2024.
- In December 2022, Canadian Utilities announced the commissioning of two hydrogen projects at the Clean Energy Innovation Hub in Australia. These include the blending of hydrogen into the Western Australian (WA) natural gas network and the first hydrogen fuelling station in partnership with Fortescue Future Industries. This will enable Fortescue, Canadian Utilities and third parties such as the WA Police to support their fleets of hydrogen fuel cell vehicles.
- Subsequent to year-end, on February 3, 2023, Canadian Utilities executed an extension to the current Power Purchase Agreement with Origin Energy Electricity Limited (Origin) for the Osborne electricity cogeneration facility in South Australia. The extension is for a period of three years, commencing on January 1, 2024, with an option for Origin to extend the term until December 31, 2027.
- On January 12, 2023, Canadian Utilities declared a first quarter dividend of 44.86 cents per share or $1.79 per Class A non-voting and Class B common share on an annualized basis, a 1 per cent increase over the 44.42 cents per share paid in each of the four previous quarters. Canadian Utilities has increased its dividend per share for 51 consecutive years, the longest track record of annual dividend increases of any publicly traded Canadian company.
Outlook:
“We expect to invest $3.3 billion in our regulated utilities over the next three years. While utility operations are the largest contributor to our earnings and will remain so for many years to come, we will also be actively investing in our energy transition growth initiatives in the coming years. Our ongoing hydrogen initiatives with Suncor, our continued pursuit of a potential energy storage investment in Australia, and are successful execution of the acquired 1.5 gigawatts of renewable generation pipeline will all necessitate significant capital investment and drive growth for our business.”
– Brian Shkrobot, Executive Vice President and Chief Financial Officer
Source: (CU-T) Q4-2022 Earnings Release
