Saturday, February 28, 2009

added more P&G

Just in case anyone hasn't noticed, consumer staples stocks, those that are usually deemed to be safe havens in a market storm, having been falling like rocks lately. Procter & Gamble is down 22% year to date, Coca Cola (KO) (10%), Diageo (DEO) (19%), Pepsico (PEP) (11%), Johnson & Johnson (JNJ) (14%), and Wal-Mart (WMT) down 13%.

I think this is just a natural stage in a major market decline where investors are realizing that these names have been piled into when the market got ugly and they are now being liquidated due to their relatively higher value. Another reason for the declines are likely due to evidence in some sectors that consumers are trading down and using less brand name goods that people might normally consider recession resistant. For example, alcohol and some health care goods have shown signs lately of reduced demand. For these large global names, the fact that the US dollar has strengthened over the past year has not helped.

In my opinion the recent decline in global consumer goods firm Procter & Gamble has been overdone. This stock is trading at 2003 levels, when it's earnings and dividends per share were $1.85 and $0.91 respectively. The company now earns $3.68 and pays a dividend of $1.60, which will be raised by April, 2009.

With a P/E ratio of 13x, this is certainly good value for a company with 25 Billion dollar brands and a growing presence in the developing world. I confidently added to my investment in PG this past week.

Thursday, February 26, 2009

trading under book value

A Company's Book Value is defined by Investopedia as follows:
1. It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated.
2. By being compared to the company's market value, the book value can indicate whether a stock is under- or overpriced.

The Price to Book ratio is used to compare a stock's market value to it's book value. The following stocks have been beaten down to the point where their market price is actually less than their liquidation value (book value). Therefore in a way the company is getting little credit for any future earnings, and in fact the market is betting earnings will decline and is valuing the company at less than the sum of it's parts. Another way to look at it is that the market is betting that book value will decline due to company specific issues.

TD Bank (TD) 0.96x book
CP Rail (CP) 0.93x book
Petro Canada (PCA) 0.83x book
General Electric (GE) 0.86x book
Ford Motor (F) 0.75x book
Bank of Montreal (BMO) 0.81x book
Dow Chemical (DOW) 0.54x book

When you look at the Price to Book ratio for a stock it is important to note what assets the company owns and how they earn money. For example Microsoft (MSFT) has a very high Price to Book ratio of 4.4x because their main income source is from selling software that smart people develop in offices, versus Toyota Motor (TM) who manufactures automobiles in enormous facilities filled with expensive equipment and supplies; they have a low Price to Book of just over 1x.

Generally companies that own and market softer goods bearing well recognized brands and having competitive advantages will have higher Price to Book ratios. This contrasts against more economically sensitive firms, and hard goods firms who's goods or services trend more toward commodities and less towards brands and intellectual property.

Wednesday, February 25, 2009

Intact's dividend intact

Wow, a Canadian financial company just raised their dividend!

It was the Dutch, 'SAVE YOUR MONEY' guy. Insurance firm, ING Canada (IIC), soon to become Intact Insurance Co. has increased it's dividend by 3.2% or 1 cent per share to $0.32/share. Their shares have been cut in half since April of 2006. Recently the dutch firm ING Group has sold it's 70% majority ownership in this company. This came on a day where US insurer Allstate (ALL), a very good past dividend grower, slashed it's dividend by more than half.

ING Canada, with an 11% market share, offers automobile, property and liability insurance to individuals and businesses through its insurance subsidiaries. It is the largest provider of property and casualty insurance in the country with more than $4 billion in direct written premiums.

According to ING Canada President and CEO, Charles Brindamour, "the decision to increase our quarterly dividend reflects our objective of returning value to shareholders. With today's announcement, we continue increasing our dividend on a yearly basis. The increase is also a reflection of the strength of our financial position, as well as the quality of our operating earnings." ING Canada reported earlier that at the end of the year2008, it had $427.5 million in excess capital, a minimum capital test ratio of 205% and no debt.

Albeit a small increase, it is very impressive for them to raise their pay out in this environment. ING Canada seems to have a focus on returning value to shareholders in the form of dividends. The stock now yields about 4.3%.

Monday, February 23, 2009

is any dividend safe?

Dividend cuts are now becoming fast and furious as companies scramble for cash amid these difficult credit markets and plummeting asset values. The list of companies that have cut their dividend in the past few weeks would be very long. Just today, JP Morgan Chase (JPM) as well as Russel Metals (RUS) in Canada were examples of the latest dividend casualties. No dividend is safe in this market.

As far as I could see today the S&P 500 index came very close to breaching it's 10 year low of 741 points, which it sunk down to on November 20, 2008. Investors are seeing no reason to own stocks right now as earnings estimates continue to decline and economic indicators are downright ugly and getting worse. This week is setting up to be an interesting one.

Despite all of this doom, gloom, and towel throwing, I still believe a lot of dividend streams are safe and these stocks can be bought confidently for the long term. My income from investments chart is struggling to keep it's head above water, and it doesn't feel great. This was the chart that was supposed to have one direction....up.

Dividends At Risk
Any company involved in the financial industry might cut their dividend. This includes the Canadian banks and insurance firms. Also, any company who derives their earnings from commodities could cut their dividend if they have not already done so. Does this make these firms bad long term investments? Not necessarily. Should you automatically sell a company that cuts it's dividend? Absolutely not.

Safe Dividends
While no company's dividend is 100% safe, I believe there are many companies in the market who derive their earnings from stable sources and have strong balance sheets. These stocks pay dividends that should not be cut. Examples of these companies are those who sell consumer staples, most health care firms, telecommunications and utility firms, and other companies that derive earnings from relatively stable sources. A low pay out ratio, strong brands, and a history of raising dividends helps. Does this make these firms good long term investments? Not necessarily. Is keeping a dividend always a bullish sign? Absolutely not.

Wednesday, February 18, 2009

good financial government

The role of government lately, is treading into the realm of personal finance advisor. On both sides of the 49th parallel governments are either commenting or implementing policy based on how they feel people should be managing their household finances.

Obama's fresh new $75B mortgage relief plan includes the following goal:
Convince lenders to cut monthly mortgage payments to sustainable levels, defined as no more than 31% of a homeowner's income. Write it down, the magic number, Barack is playing Suze Orman.

Let's assume this means 31% of gross income. If so, our lender needs no incentive as our mortgage payments represent about 12% of our income.

North of the border in Canada, Bank of Canada Governor Mark Carney came out and said that he is concerned about the level of household debt in Canada. Household debt in Canada currently sits at 130% of people's disposable income (a higher ratio than the United States). Average household debt in Canada rose to more than $90,000. Debt is apparently rising faster than income is in Canada.

Carney would not like the moneygardener's household finances. Our household debt represents about 175% of our income. I'm not concerned with our level of debt. Our Debt/Asset ratio is 0.54, meaning we have almost twice the assets as we do liabilities. Servicing a mortgage which comes in much less than Obama's 31% of income, means we are able to move the needle in the right direction by accumulating more assets while reducing debt slowly. Our income may pale in comparison to our debt now, but we're young and I'm confident that our debt is manageable given our assets and income.

What would Obama and Carney think of your personal financial situation?



Wednesday, February 11, 2009

teenage dirtbag

If I just knew then what I know now! A reader recently emailed me inquiring:

If you could give high school students one piece of financial advice, what would it be?

The Responsible Canadian Response
High School is one of the most crucial times in your life money-wise. That is, this is the time period where you really start to establish your attitudes towards, and habits with money. Know that your post secondary education will be expensive and save a very large portion of your income (whatever is not spent on clothes, because really what else do you have to buy, you're lucky enough to have food and shelter provided), probably about 90% for University or College. You will be glad you did when you are about 24 or so.

Also, take control of your finances. If your mother is still managing your bank account, cut the cord. Take the time to understand how to manage all of your day to day banking needs. Did I mention you might need to get a job, I hope this goes without saying..

the moneygardener add in
I couldn't give my opinion without pointing out the elephant in the room. You are YOUNG! Being young's advantages are not limited to having wrinkle free skin, looking good in skinny jeans, and knowing what Twitter is. You have many potential years of investment growth ahead of you; more than this 30 year old could ever dream of. If you are at all inclined, socking some money away in a few dividend paying stocks or index funds would not be a bad idea.

What book would you recommend to a high school student on the subject of personal finance?

Duh...The Wealthy Barber by David Chilton. Put the Nintendo Wii down and read a book!

Now get back to studying for those midterms pimpleface!

Thursday, February 5, 2009

energy dividends going by the wayside

On December 17, 2008 I titled my DIV-Net post "Energy Dividends On The Chopping Block", as I made the case that the extreme drop on in oil prices could cause dividend paying energy stocks to cut their dividends.

Husky Energy (HSE) announced they will cut their dividend from $0.50/share to $0.30/share. The company actually put it a different way, they have 'set' their dividend to $0.30/share. That is a 40% cut. Husky is adapting to a much lower energy price environment. The stock now yields about 4% on yesterdays closing price.

The other stock I mentioned in the post BP, just announced earnings and left their dividend unchanged. The company announced their first quarterly loss in seven years but stated that they can have a break even 2009 with oil prices between $50-$60 per barrel The stock yields 7.8%.

Several other Canadian oil and gas trusts have slashed their distributions including widely held, Canadian Oil Sands Trust (COS.UN).

Monday, February 2, 2009

potato wedges - on slippers & hats...

After enjoying and featuring "..Kraft Dinner.." by the colourful blogger, Potato, over at Blessed By The Potato, we thought we'd sign him to a temporary guest column series contract with the moneygardener for an undisclosed sum... This post series promises to be unlike any other consumer reporting/ offbeat commentary you've ever read. John Stossel eat your heart out.... This series will be a change of pace, and we're calling it potato wedges. Enjoy...

On Slippers and Hats and Warm Woolen Mittens

Energy costs are crashing, and we're probably going to be due for a credit/adjustment from Union Gas before the winter is out – but for the moment, we're paying through the nose for our heat. Roughly 30% more than last year. So conservation is big in our minds at the Potato homestead, for both financial and environmental reasons.

Making changes to your home to make it more efficient are great steps to take. Since we're renting here there's a certain limit to what we can do: we've put plastic wrap over the windows and caulked the cracks we could find, and we have opened and closed registers so that most of the heat is flowing in to the kitchen and the bedrooms (where we spend most of our time).

The next step, and one that is sometimes overlooked, is to bundle up. Heat yourself, not the house… that actually reminds me of an amusing anecdote often shared at conferences: at one point shortly after the miracle of microwaves was discovered (and apparently more recently, too), it was proposed to use them to heat people. Yes, people -- a microwave/millimeter beam would heat you up in your own living room, because as long as you were warm it wouldn't matter how cold the room was. But I'm not here to talk about the mad science of the 1930's.

As much fun as it is to run around the house in a T-shirt like I do at work (oh, they waste so much heat at work), I can turn the heat down a few degrees by just throwing on a sweater. Of course, even more important than a sweater are slippers. Keeping your feet warm is key to staying comfortable in what is otherwise a frigid house. Not just because they're the furthest part of your body from your heart so they go numb and cold quickly, but also because they make direct physical contact with the cold floor.

The slippers I have right now are really crazy warm. They're Darth Vader slippers, and his mighty head is pretty much solid stuffing which is just oh so toasty warm. Of course, I don't know if it's the fact that I tend to drag my feet when I'm wearing slippers or what, but they freak the hell out of the cat. Ah well, a small price to pay for energy savings (and though the cat doesn't have slippers, she's fluffy and doesn't seem to mind the cold).

The next step for me is going to be hats and gloves. So far I've held off because I want the house to be warm enough that I can type without gloves, since I spend so much time on the computer, but a hat makes perfect sense. I mean, ok, it does seem kind of goofy to run around the house in a toque, but they do always say that a large part of your heat loss is through the head…