• A few weeks ago, a member of Dividend Stocks Rocks enquired about Enbridge and Transcanada. Since both companies are trading on the same symbol on both US and Canadian market and that they are at the center of the attention with the Keystone XL pipeline, I thought it worthwhile to take a look at them.

    While small oil companies cut their dividends and oil exploration related companies saw their contracts cut, there is still a type of company related to oil that is providing immediate growth potential: pipelines!

    The pipeline industry is quite simple; it’s costly and complicated to put it in place (just look at the Keystone XL pipeline saga), but once it is open; the owner charges a price per barrel going through it. The best part; the flow of oil moving through pipelines is very stable. Therefore, it’s like having a direct line with a never-ending ATM. After reading this paragraph, you are probably going to ask: Mike, if pipelines are such an amazing dividend payers, why is it that both ENB and TRP are NOT part of your DSR portfolios? This is a worthy question. Let’s take a look at both companies to see why we haven’t picked them.

     

    Enbridge (ENB)

    Enbridge Inc transports and distributes crude oil and natural gas. It is also engaged in natural gas gathering, transmission and midstream businesses and power transmission.

    When I first looked at Enbridge’s DSR profile, I wasn’t impressed….

     

    enbridge profile

     

    Very high payout ratio, ever dropping EPS and hectic revenues. This doesn’t sound much like a never-ending ATM to me! The company struggles to show consistent fundamentals while trading at a very high P/E ratio (around 62). While their business model definition inspires trust and conservative investment; their fundamentals do not speak the same language.

    Then, we decided to dig further and look at ENB’s website and presentations. Here’s what we got from their 2015 Guidance Conference Call:

     

    industry leading adjusted EPS growth

     

    They use non-GAAP measures to adjust their earnings and show you they continue to make more money than before. Then, I looked at their statement of earnings to understand what is going on. I found that from 2012 to 2013, ENB operating income dropped by 14% due to higher expenses. I also looked at their cash flow to see if the pipeline was really growing the cash (keep in mind that EPS is based on accounting principles where the cash flow statement is king for any business). Well… due to a very high amount of investment, the cash flow statement is also lower in 2013 from 2012. There are good news related to this statement; #1 operating activities generate more cash flow than before and #2 if ENB invest massively, it also means they expect to make more money in the future.

    I’ll be honest with you, I’m not a pipeline expert. Therefore I had to search throughout many documents to find why and how ENB was able to play some magic with their earnings and post growth while I see a big downtrend from Ycharts. Here’s their definition of adjusted EPS (source Yahoo Finance):

    The adjusted earnings discussed above exclude the impact of unusual, non-recurring or non-operating factors, the most significant of which are changes in unrealized derivative fair value gains and losses from the Company’s long-term hedging program and gains on the disposal of non-core assets and investments, as well as certain costs and related insurance recoveries arising from crude oil releases.

    Let me translate this for you: from my understanding, this means; the pipeline business continues to generate higher and higher profits but the hedging strategies around oil prices and the disposal of various assets/investments hurts their profit big time… year after year. There is one thing I’ve learned from EPS. Yes, it is based on accounting principles and you can trick them from time to time. However, you can’t trick them forever; if the business is making more and more money, at one point in time, the EPS will follow. This isn’t happening with ENB. After this analysis, you probably understand why ENB is not part of any DSR portfolios.

     

    Transcanada (TRP)

    All right, now, let’s take a look at TRP DSR Profile:

     

    transcanada profile

     

    At first glance, TRP’s fundamentals look a lot better than ENB. What really catches everybody’s attention right now is more if the Keystone XL project will happen or not. While the State Department looked at the project, it published a positive report saying it would have minimal impact on environment. However, they also mentioned that if the oil prices were to fall below $70, “price below this range would challenge the supply costs of many projects”. We all know Obama is not too eager to see this pipeline crossing the USA and, according to some, would result only as a benefit to Canadians. For now, the best move for any investor would be to look at TRP and exclude the pipeline perspective. If Keystone XL happens, than you can simply add this to your “best case scenario”. Since TRP can also look at its other project (Energy East) that goes across Canada instead of into the US, you can bet TRP will eventually get a pipeline… From the graph found on the next page, you can clearly see that TRP’s pipeline diversification doesn’t stop at Keystone XL or Energy East by any means (source TRP presentation):

    In their most recent presentation, TRP expects to double its dividend growth rate from 2014 to 2018. For the past two years, it shows a 4% dividend growth and it should bump up to 8% annually. This wind of optimism is due to successful small to medium-sized projects (e.g. not major pipelines). If this would happen, the dividend growth might grow even stronger post 2018.

    Overall, if I had to choose between Enbridge and Transcanada, I would definitely buy TRP. TRP’s fundamentals are stronger, P/E ratio is smaller (62 vs 21) and dividend yield is higher. On top of all this, TRP has a lot of upside potential in the event of one of the two major pipelines get approved.

    6 Comments   |   Read more >
  •  

    If I tell you that you can build an everlasting portfolio with minimum effort that has beat the Canadian S&P TSX for the past 20 years and will pay on average 4% in dividends, would you become my client? And this portfolio currently pays a 4.14% dividend yield.

     

    Fortunately, you don’t have to pay me for building this portfolio. In fact, you don’t need much…. Just a crazy thought. Since I’m a nice guy, here it is; I’ll give you the ultimate trading secret portfolio managers want to hide from you.

     

    Here’s the crazy idea: why dont you fire your broker, sell all your stocks and mutual funds and buy the big 5?

     

    Say what? Yes: there is an investment philosophy (that is not ready to stop) showing the simplest investments with one of the highest returns. All you have to do is to buy the five biggest banks of Canada:

    TD Bank (TD)

    Royal Bank (RY)

    ScotiaBank (BNS)

    CIBC (CM)

    BMO (BMO).

    Good news for US investors; you can buy Canadian banks on the NYSE as well! There is no reason why this is not a good investment strategy. After all;

    #1 Canadian banks form the strongest banking system in the world

    #2 They evolve in a heavily regulated country where the Government protects them from themselves

    #3 Canadian banks barely suffered from the 2008 credit crisis

    #4 They are among the first ones to increase their dividends, year after year.

    #5 Canadian banks are part of a comfortable oligopoly where their business is not threatened by foreign players.

    #6 Canadian banks trade at a low P/E ratio helping their dividend yield beat inflation.

     

    Before I keep going, I must tell you that I’m not the one who discovered this fantastic investing strategy. In fact, Peter, a long time Dividend Guy Blog’s reader, sent me two articles from the Globe & Mail asking for feedback:

    Should I bank on all-bank portfolio?

    Why an all-bank portfolio is bonkers

     

    In short, the author tells you it’s not a good idea in the first article and keeps telling you the same thing in the second post after reading so many comments from bank lovers. As you probably realized by now; Im being sarcastic; there are millions of reasons why investing it all in the big 5 is a VERY BAD IDEA.

     

    John Heinzl, the G&M journalist, gives a pretty good explanation but I thought I would demonstrate my point of view with a single analogy. I’ll compare the insurance and the investment world for a second. By investing all your money into 5 stocks, you ignore the diversification principle to make more money based on the past 20 years of data. In financial theory, the diversification principle works as insurance on your portfolio that you won’t lose everything tomorrow morning. Here’s the comparison with the insurance world:

    Let’s take my situation for example; I’m 33, married with 3 kids. I make about 4 times my wife’s income and we have a mortgage and a car loan. I could decide to not buy insurance. After all, what are the odds of a healthy non-smoker 33 year old man of dying in the next 12 months? Barely none, right? So why do you think I’m insured anyway? There is a huge difference between the word “hazard” and “risk”.

    Searching through the business dictionary, you will find the following definitions:

     

    Hazard: Condition or situation that creates or increases chance of loss in an insured risk, separated into two kinds: Physical hazard and Moral Hazard.

    Risk: A situation where the probability of a variable (such as burning down of a building) is known but when a mode of occurrence or the actual value of the occurrence (whether the fire will occur at a particular property) is not. A risk is not an uncertainty (where neither the probability nor the mode of occurrence is known), a peril (cause of loss), or a hazard (something that makes the occurrence of a peril more likely or more severe).

    Source (Business Dictionary)

     

    So my situation (hazard) doesn’t really increase my chance of dying in the next 12 months. However, the impact of death on my family’s financial situation (risk) is too important to ignore.

    If you invest all your money into Canadian banks, your hazard is not too big. However, the risk of losing 50%+ of your money during a crisis is too important to leave your portfolio unprotected from it.

    The world is full of individuals who haven’t paid a cent in insurance and that are now 60, 70 or 80. Imagine all the money they have saved! But for the few who died uninsured in their 30’s or 40’s, ask their families what they went through.

    In 1998, nobody thought that GM, the world biggest car constructor would fail 20 years later. Nobody thought that Lehman Brothers, a more than century old financial institution would bow down on their knees one day. Who knows what is going to happen to Canadian banks in the next 20 years from now. I’m not taking the risk to go through it!

     

    All bank portfolio investors; please tell me why you sleep well at night?

    10 Comments   |   Read more >
  •  

    Last year, we said we were moderately bullish for the Canadian market for 2014. After beating the S&P 500 for 10 months in a row and reaching almost 15% growth, the TSX is now back to a small +1.89% as of December 11th 2014. Who’s guilty of this huge drop? The answer is as simple as “oil prices”.

    While we expected price stabilization in 2014 for the price of oil, we were right until OPEC decided to keep their market share away from both Canadians and Americans by increasing their production enough to push the barrel under $60. This situation will unfortunately last a good part of 2015 and will hurt the Canadian economy globally. If you hold oil related stocks, you will have to be patient.

    The other important Canadian sector is the financials. Banks have kept their lead ahead of the TSX throughout the year but slowed down in December posting disappointing results. The housing bubble is still hanging overhead and the fact the economy should not be too great in Western Canada will probably push the bubble to burst. This will definitely hurt banks over 2015. However, while I personally expected the housing bubble burst since 2012, it seems that the market is smoothly landing on a non-growth plateau and is ar a stand still. I like this scenario but I doubt it will hold steady.

    For the good news, the Canadian Loonie kept losing steam compared to the US dollar and this situation will continue in 2015. This will help manufacturers from Ontario and Quebec to perform better. However, the shift in the economy is not automatic and we will have to wait a few more months before we actually feel the growing appetite of US consumers for Canadians products.

    I don’t mean to say “I told you” but we mentioned it would be hard to reach higher than a 5% return with the Canadian market in our 2014 book and we will pretty much finish the year with a 5% return including dividend.

    For the year to come, we expect the Canadian market to continue its slowdown. As long as the world interest for oil and other resources will remain low, Canada won’t be able to establish itself in a leading position through the stock market. It doesn’t mean there aren’t good opportunities; I think it’s the opposite. The current turmoil will enable awesome picks to outperform over the next year to come. Once again, we are moderately bullish for the Canadian market. We will end 2015 in positive territory, but the US market will do better.

    As I do it each year, I’ve picked 10 Canadian dividend stocks to beat the market in 2015. My 2015 selection includes companies selling products directly to American consumers in order to benefit from the drop in oil price leading to a bigger family budget. Once again, I am bullish for 2015, but which dividend stocks will do better? Using my 7 dividend investing principles, I’ve made my list of the best dividend stocks for 2015 and I’m sharing 3 of them today.

     

    Which Canadian Dividend Stocks will Outperform the Market?

    AG GROWTH INTERNATIONAL (AFN)

    AGI

    COMPANY DESCRIPTION:

    Ag Growth International Inc is a manufacturer of portable and stationary grain handling, storage and conditioning equipment. It offers augers, conveyor belts, storage bins, handling accessories and aeration equipment. They operate across the planet showing 53% of the sales in US and 26% internationally (leaving only 21% in Canadian sales).

    STRENGTHS:

    If there is a company that could benefit from lower cost of transportation combined with a weak Canadian dollar, it is probably AFN. Since 53% of their sales are done in the US, it wouldn’t surprising to see this number will increase in 2015 considering the strong US economy. The company shows a good ability to grow by both internally and through acquisition. In 2014, they acquired Saskatchewan based REM GrainVac product line. Their five years sales growth is showing double digits and the dividend yield is not bad either.

    WEAKNESSES:

    Since there are lots of hopes put on this company from the Canadian market, the P/E ratio is high at 31 while it has traded generally under 25 over the past 5 years. The payout ratio is definitely above our standard as well at 94%. If the company fails to bring in strong numbers, this is a good example of a company that could drop rapidly. However, we don’t think it will happen.

    COMPANY METRICS:

    DSR AFN

    INTACT FINANCIAL (IFC)

    INTACT

    COMPANY DESCRIPTION:

    Intact Financial Corporation provides property and casualty insurance in British Columbia, Alberta, Ontario, Quebec and Nova Scotia. It distributes insurance under the Intact Insurance brand through a network of brokers and its subsidiary, BrokerLink.

    STRENGTHS:

    IFC is now working on a stronger distribution platform and plans to expand in Brazil to diversify its business outside Canada. We expect IFC to keeps its growth rate in the double digits for both revenues and EPS. This should give more room for additional dividend increases. The demand remains strong in Canada for insurance products and IFC has a well established business model. Since Mother Nature may not be as rough as it was last year with Alberta’s flood, we should see bigger profits in 2015 for IFC.

    WEAKNESSES:

    We don’t see any major clouds over the head of IFC at the moment. The market for insurance is robust and IFC continuously posts stronger results than its peers. Only a big natural disaster could hurt IFC in 2015.

    COMPANY METRICS:

    DSR IFC

    NATIONAL BANK (NA)

    NA.TO

    COMPANY DESCRIPTION:

    National Bank is the 6th biggest bank in Canada. It provides numerous financial services to individual, commercial and institutional clients. Their services range from regular banking, investment, insurance, brokerage, mortgages, loans, etc. NA is considered more as a regional bank with a leadership position in the province of Quebec.

    STRENGTHS:

    National Bank has been able to produce and report record profits for 2014 for two major reasons. The number one is due to its trading market sector. They generate almost 40% of National Bank’s revenues and this segment is highly profitable. The second reason is linked to their wealth management platform. Their private wealth (1859) and brokerage firm (National Bank Financial) continued expansion outside Quebec with great success. The bank is less at risk than its peers in regards to the mortgage market as about 70% of their business now comes from the other two segments mentioned above. This is a small bank with strong potential. It currently trades under 11 P/E paying over 4% dividend yield.

    WEAKNESSES:

    Since a huge part of its business depends on the market, National Bank is also at risk of showing a drop in revenues at any moment. Since it’s the smallest of the big banks, be prepared to see additional volatility with the stock price compared to the “big five”.

    COMPANY METRICS:

    DSR NA.TO

    Want More? I have 16 other Dividend Stock Picks in my Book!

     

    I’ve compiled a list of 20 dividend stocks to do well in the market for 2015. You just read about four of them, but there are still lots to discover in the book! The book includes the 20 dividend stock analysis plus 10 Canadian dividend stocks. That’s 40 pages worth of information for only $4.99.

     

    This year, I offer both versions: PDF or Kindle.

    Best 2015 Dividend Stocks

     

    Click on the following button to buy the PDF version

    Buy Now

     

    Click here to buy the Kindle version (Amazon link)

     

     

    Disclaimer: I hold NA.TO in my personal portfolio and all stocks mentioned in this article are part of our DSR portfolios.

     

    1 Comment   |   Read more >
  • Page 1 of 1212345...10...Last »