Tuesday, July 31, 2007

around the market

Marathon Oil (MRO), which is the U.S.'s 4th largest energy company has agreed to buy Canadian company, Western Oil Sands (WTO) for 5.8 B. Confirmation that foreign companies are interested in these long life, capital intensive reserves is sending shares of anything to do with the oil sands higher today.

Canadian Oil Sands Trust (COS.UN) is up 3.3%
Suncor (SU) is up 3.3%
Petro Canada (PCA) is up 3.3%
Encana is up 2.2%

Johnson and Johnson (JNJ) has announced it will be cutting it's global workforce by 3 - 4%. That represents about 4,000 jobs. This move is expected to save the company around 1.5 B for 2008. The stock is up about 2% on the news.

Sun Life Financial (SLF) reported a quarterly earnings increase of 15%, topping analyst estimates. More mutual funds and life insurance policies were sold in Canada as well as the U.S., and less people died.

Sun Life also increased their dividend 6% from $0.32 to $0.34. Sun Life has increased their dividend by a compounded rate of 19% over the past 6 years.

Monday, July 30, 2007

canadian financials dive

Canadian financial stocks were still falling today after giving up the entire year's gains last week. Fears of rising interest rates are sending most financials South, with some exceptions.

XFN, an exchange traded fund (ETF) that tracks Canadian large cap financial stocks is currently over 7% below it's 52 week high, and yielding 2.5%. XFN is trading at $52.86 and is in correction-mode technically, the next resistance point I can see is around $52.30.

Banks I follow in Summary:

Bank of Montreal (BMO) is now yielding 4.1%, trading at a P/E of 12.7, and trading at it's lowest levels since Fall of 2006. BMO was recently involved in some shady trading activity where they had the potential to lose large sums of money due to bad natural gas bets. Technically BMO looks horrible, as it traded today as low as $66.70 which is a low not seen since October, 2006 as far as I can see. The next resistance point looks to be around $65.80. The chart looks like a jagged hill sloping downward.

Bank of Nova Scotia (BNS) who is gaining a reputation as Canada's international bank is now yielding 3.7%, and is trading at levels not seen since October, 2006. The bank is trading at a P/E of 12.6, and a forward P/E of 11.2. Technically the chart looks to be in a free-fall, unless it bottomed today. It could see resistance around $48.00 if it falls further. Scotiabank is 10% below its 52 week high.

Royal Bank of Canada (RY); Canada's largest company by market cap, is yielding 3.3%, and is trading at $53.99 which is a P/E of 13.4 and a forward P/E of 11.7. Royal is 10% off it's 52 week high, but $53.60 would be a major resistance point that it has not yet broken. If the stock breaks below $53.60, the potential for more downside is present.

Toronto Dominion Bank (TD)'s chart appears pretty solid, and the stock is holding up relatively well. The company is yielding only 3.0%, and is trading at a P/E of 14.9, with a forward P/E of 11.4. The stock has some resistance around $68, and is currently holding up trading at $68.85, which is 8% off it's 52 week high.

Valuation-wise I like BNS here as I believe it is trading at a significant discount to fair value. BMO is starting to look more attractive as it gets lower here, but I would like it lower yet. The other two banks don't excite me at these levels.

- Even if the bank earnings do get hurt by higher interest rates in the near-term I am confident buying BNS or BMO soon for the long term if they keep declining.

Wednesday, July 25, 2007

want a raise?

Recently my wife passed her hire date anniversary with her employer and was up for a raise in her salary. This got me thinking about raises in general. Others may have differing opinions on the matter, however I usually think of an above average raise as being in the 5% or greater range. Considering inflation usually runs about 2%, we could translate a 5% raise into about a 3% raise in real dollar terms... nothing to write home about.

This brings me to the fact that the power of dividend growth can sometimes be astonishing. If one invests in large cap companies that raise their dividend regularly, they'll usually give you a raise in that dividend every year without you having to lift a finger.

Let's look at a hypothetical example of a small portfolio of a few companies across a few sectors in order to see what type of raise you could have expected over the last while: (The figures are 1997 vs. 2007 - a 10 year term of ownership)

Johnson & Johnson - 100 shares 1997 paid you $44 / 2007 = $166
Procter & Gamble - 100 shares 1997 paid you $45 / 2007 = $140
Royal Bank of Canada - 100 shares 1997 paid you $40 / 2007 = $184
General Electric - 100 shares 1997 paid you $35 / 2007 = $112
McDonald's Corp. - 100 shares 1997 paid you $16.50 / 2007 = $100

Portfolio Totals
In 1997 100 shares paid you $180 in dividends and now the same 100 shares (2007) pay you $702.

This represents an average yearly raise of about 14.5% every year....maybe worth at least an email home...

Tuesday, July 24, 2007

Yellow Pages Income Fund

Continuing my foray into Income Trusts as part of my strategy to develop a section of my portfolio that should provide stable income and some capital stability, I have initiated a position in Yellow Pages Income Fund (YLO.UN). Yellow Pages Group earns most of their revenue from advertising fees paid by companies who need exposure within their print directories that cover 97% of the Canadian population; they are Canada's largest directory publisher. They also have a burgeoning online presence with popular sites such as Canada411.ca and their 'Find Engine' at YellowPages.ca. Yellow Pages Group has also recently acquired Trader Corporation who puts out popular publications like Auto Trader, among others.

The type of revenue garnered from this ubiquitous brand-name directory is exactly the type of cash flow that I am after for relative stability of unit price and stability of distributions. S&P has assigned this trusts distributions with a SR-2 stability rating. Despite unfounded rumours of its demise, the print directory business has been consistently achieving greater than 6.5 percent organic earnings growth compounded. I believe that despite the emergence of the Internet, people will still rely on the hard copy Yellow Pages as a main source of information. Directory margins are phenomenal, always exceeding 50%.

In the online arena Yellow Pages has impressed me with their various offerings. The 'Find Engine' especially is a great tool for ever day use. Their online earnings have recently been growing at a greater than 30% clip and I don't see any reason why this should not continue given their brand name, online presence, and tie-in opportunities with the directory business (ie autotrader.ca, yellowpages.ca, various individual city sites). Of course there is enormous competition on the Internet, however this company has shown that they can deliver best in class growth and products. They are putting priority on the online strategy, while at the same time they have a stable, yet growing directory business that they are able to drawn from and cross promote.

The trust maintains a pay out ratio of just below 90% and has a proven history of raising distributions while maintaining lower debt levels (debt/equity of 0.45). Yellow Pages makes no bones about their plans to convert to a corporate structure while maintaining and increasing their pay outs come 2011. The trust is currently yielding around 7.8%. They will maintain a buffer between cash for distribution and total available cash, in order to work the taxes in. It's no surprise that this trust lays it all out, as their management team has been heralded as one of the best in Canada by several analysts.

Risks to Yellow Pages as an investment include increased use of the Internet vs. phonebook directories. So far YLO has been able to sustain organic growth rates here, but as the technology improves more people could change their habits. If advertisers flock to online vehicles instead of traditional print directories this could hurt revenues. Yellow Pages Group's Internet strategy could fall flat on its face as competitors like Google, Craigslist, etc. emerge and excel.

The consensus on this stock is currently a 'strong buy' with 6 analysts following along. Technically the stock has held up pretty well since the Halloween Massacre when it was trading around $15/unit. The stock now trades around $14, and has recently visited the $14.50 area. If I could turn back the clock this would have been an excellent trust to load the truck up with after Halloween when it tanked to $12 momentarily (where it would be yielding 9.1% today on that price).

I used the funds made available by my Petro Canada sale to fund about half of this initial purchase of YLO.UN. The trust section of our portfolio is now approximately 45% complete with about 5 months remaining until our employment income drops.

Monday, July 23, 2007

trimmed Petro Canada stake

I have trimmed my stake in the integrated oil and gas company Petro Canada by selling about 25% of my holdings today. I made this decision based on several factors. First, I am up about 30% on PCA in less than one year's time. This stock has run up 45% since March, 2007. Also, oil is now back near it's highs after seeing some lower levels earlier in the year when PCA was trading in the $40 - $45 range. Petro Canada ran up after reporting good earnings, while oil rose; however the anticipation of future earnings power due to higher refining margins sent this stock above $60 per share, which I feel may be slightly overbought.

I could be wrong and the stock could continue upwards now, however their is no shame in taking some profits after a large short term gain. I believe the time to take some profits on resource names like this is when the resource is relatively high and expectations are high for continued strength. Things can change very quickly in markets. I remember, what seemed like just a few months ago, many were calling for $40/barrel oil.

I am usually not a seller of stocks under normal circumstances but I saw this as a great opportunity to take a healthy profit off of the table while the conditions were right (ie high oil, great run, high expectations).

Petro Canada reports their second quarter earnings on Thursday, July 26. It will be interesting to see if the company can overcome the high expectations that the market has built up. This may be one of those earnings reports where the company beats expectations but the stock drops.

I am still holding this company for the long term, and I shouldn't regret locking in some profits in these early stages.

Saturday, July 21, 2007

10 laws to building wealth

The Summer issue of 'MoneySense' magazine contains this piece, written by Barbara Hawkins. I would like to provide a brief summary of the article:

Getting rich has always been a dream, but not it's a science too. Over the past two decades, researchers in the burgeoning field of behavioural finance have studied how we think about money, while business professors have probed the surprising ways in which wealthy people amass their wealth, and finance professors have expanded their knowledge of how markets work. Want to know the secrets of how to increase your own net worth? We've compiled the best of this recent research (as well as some time-honoured wisdom) into 10 laws of building wealth.
  1. Understand your Psychology when investing. Chasing what's hot, and overconfidence are common examples of what not to do.
  2. Learn from your mistakes by monitoring yourself and being open to scrutiny. Keep a trading journal, understand why you took certain actions, and ask for others opinions.
  3. Paying yourself first and automatically are the keys to saving well.
  4. Concentrate on managing spending habits. Building wealth is more about your bottom line than your top line.
  5. Take some risk. Admit defeat and don't hang on to bad ideas.
  6. Know your edge, and know your limitations. This is likened to an amateur tennis player that sabotages himself by trying to hit winning shots. The best weekend players win simply by hitting the ball over the net consistently.
  7. Diversify, insure yourself, and play defense.
  8. Keep fees down.
  9. Use the couch potato portfolio technique.
  10. Always remember what's really important in life. True wealth consists of ignoring other people's opinions and seeking out what makes you happy.

Wednesday, July 18, 2007

how i value stocks

Several people have mentioned recently that they would like to know how I go about determining a fair value for a stock. I use a fairly long, involved process to accomplish this but I thought I could share it in summary here and if people would like more detail they can email me privately on the topic.

Basically I use a mathematical method where I discount all future earnings and dividends back the the present to determine what a stock should be worth today. This method of course involves several assumptions, especially on the earnings growth rate going forward. I try to be as conservative, yet realistic as possible when valuing a stock. Around the internet you will find several versions of disounted cash flow calculators or dividend based discounted cash flow calculators. I use one version of each of these during my analysis.

Variables that I need to determine:

EPS (earnings per share) last 12 months

Estimated P/E (Price to Earnings) Ratio in 5 or 10 years - (to be conservative here I use the lowest P/E the company has ever traded at)

Discount Rate - I always use 11%

Current Dividend Rate

EPS Growth Rate going forward - This is the most important number in the calculations. I look at EPS growth long term as well as estimates going forward. I try to select a number that is conservative yet realistic given many factors such as the company's past, industry fundamentals, analyst estimates, company's performance in poor conditions, and future prospects.

All of these numbers get plugged into the two calculators mentioned above. Out of this I get two share price estimates. Let's say $40 and $55 per share are the estimates of fair value. I then average these two numbers ($48), and compare the current share price to the average. In order for the stock to be considered cheap, the company needs to be trading at a significant discount to the average price and in most cases the company must be trading below the lower estimate ($40). If a company is trading below the lower estimate then that is a good sign that the company is trading at relatively low levels compared with my earnings expectations and compared with what it has traded at in the past during similar market conditions. The reason that this happens is because as mentioned in my models I have used the lowest historical P/E, and I am conservative with my earnings estimates.

I will never use yield when determining a good entry point. The reason for this is because stocks always behave based on earnings growth and anticipated earnings growth. If a stock is yielding at a very high level relative to historic levels, this usually means that the earnings expectations are poor. Does this mean the stock is cheap? Not necessarily, it's only cheap if the market is pricing the stock as if it will grow earnings at 6% and it actually grows earnings at 10%. Perfect example of this currently are Pfizer (PFE), Rothmans (ROC), and Bank of Montreal (BMO).

Because stocks are always priced based on anticipated earnings growth, when modeling like this you always need to take a guess at future earnings growth in order to determine a price. If you can make an educated guess based on research, and be conservative then at the very least you will know when the stock is near fair value, and when it's expensive. For example recently I bought Sun Life Financial because the market was pricing the company to grow their EPS at much less than 9% per year based on my estimates where I used their lowest P/E ever as a baseline.

I certainly do not claim this process to be the 'be all and end all', however I truly think it gives me a much better idea of what is expensive and what is reasonable out there as far as valuations go. If a really great earnings growth company stumbles over and over, and their earnings continue to decline over time, then this model will not catch that, as it will probably indicate that the company is cheap each quarter as earnings are reported lower than estimates. What I find this model does catch is when a quality company is being discounted for fear of reduced earnings growth. Obviously the more stable and steady the earnings growth is the better the model works which allows it to work better with large established 'blue chip' non cyclical companies, which are typically the companies in which I invest.

Tuesday, July 17, 2007

net worth update july, 2007

Results for the two months ended July 15, 2007.

  • Debt/Asset Ratio moved down from 0.60 to 0.58

  • Net worth up 8.4%

  • Total Assets up 4.0%

  • Total Liabilities moved up 1.1%

  • House Value / Total Assets moved down from 77% to 75%

  • Non registered portfolio moved up 19.2%

Good progress. Some more debt was taken on due to our large patio project. After some thought and a little research, I adjusted our house value by a conservative $5,000 due to the addition which ended up costing around $4,000.

Monday, July 16, 2007

'relationship' banking

Recently I had the rare opportunity to actually meet with a live staff member of our home branch at the Bank of Montreal concerning our line of credit. In today's age of online banking complete with Epost, direct withdrawals, and messaging features, I am usually staring at a screen when I interact with BMO.

I have to smile as I remember the days when I would stroll into the bank as a kid with one of my parents who would spend some time filling out those little yellow slips in order to make a withdrawal or deposit, at the 'stand up' desk while waiting in line.

I noticed during our meeting the word 'relationship' kept coming up. I am usually adamant about shopping around, and looking for value when making my purchasing decisions in life, but this got me thinking.... I know it is in BMO's best interest to lull me into a 'relationship' with them, so that I will mindlessly pay them fees and interest because they are the comfortable choice; but could this arrangement actually help me?

Is there any way someone of my meagre financial stature could benefit from a 'relationship' with a bank?

Perhaps getting to know one of their financial managers by name and not having to introduce myself each time I go in for a meeting might be a good idea. Perhaps as the years go by and I grow my assets, pay off my debts, and accumulate wealth I could benefit from a 'relationship' by obtaining a lower interest rate, flexible terms, or better service. Perhaps if I can develop this 'relationship' now, BMO could better interest rates offered by anyone else including what a broker could find, when my mortgage is up in 3 years. They did seem a little disappointed that we did not have our mortgage with them. If they know me by name, know my stable and reliable history, and loyalty, could this benefit me in the long run?

Do they want my business enough to go the extra mile?

Is this 'relationship' worth my time, should it be just another tool in my arsenal that I use before I shop around, or should I pass it off as a marketing ploy?

I would be curious what thoughts and experiences others have in this area.

Friday, July 13, 2007

the golden blogs

The ballots have been cast, the red carpet rolled out, and the keyboards dusted with aerosol cans:

The Award for "Best Blog Name" goes to - Middle Class Millionaire @ http://www.middleclassmillionaire.blogspot.com/

If that doesn't sum it up for most of us, I don't know what does.

The Award for "Most Frequent Poster" goes to - Mr.Cheap @ http://cheapcanuck.wordpress.com/

I can always count on you for some new reading material, you surely deserve the golden mouse pad statue.

The Award for "Best Use of a National Symbol" goes to Four Pillars @

What a great Canadian Flag, makes me proud every time I visit.

The Award for "Most Populated Visitor Map" goes to Jungle Guy @ http://www.financialjungle.com/

Who knew posts on Vancouver Real Estate would go over so well in Kenya.

And Finally the Award for "Most Impressive Net Worth" goes to Money Diva @ http://themoneydiva.blogspot.com/

32 years old and a net worth of $655,100. All that and she looks good in a dollar sign medallion, what's not to love?

Thursday, July 12, 2007

Walgreen raises dividend for 32nd consecutive year

Walgreen today increased the quarterly dividend 22.6 % to 9.5 cents per share from the previous rate of 7.75 cents per share.

The dividend increase raises the annual rate from 31 cents per share to 38 cents per share.

Walgreen has paid a dividend in 299 straight quarters (more than 74 years) and has raised its dividend for 32 consecutive years.

Monday, July 9, 2007

comparing buybacks

It is always difficult to decipher the reason for a company buying back its own shares in a big way. What the company claims the reason to be, and what the reason actually is are often not the same thing. Most official statements include the phrase 'increased shareholder value'; however there are many specific reasons to buy back shares, that might not sound as warm and fuzzy within a press release that is automatically sent to you as a shareholder via the investment relations system. I think each buyback needs to be examined individually to determine whether it is a positive for shareholders or not.

Since it's difficult to determine why a company is buying back loads of it's own shares, lets look at some recent buybacks in terms of scale:

Johnson & Johnson (today), market cap = $183 B

Home Depot (June 19), market cap = $80 B

SHARE BUYBACK = up to $22.5 B

Wal-Mart (June 1), market cap = $200 B

SHARE BUYBACK = up to $15 B


ConocoPhillips (today), market cap = $137 B


Recent findings which appeared in the Journal of Financial Economics indicated that companies who buy back their own shares outperform the market by an annualized average of 3.1% over the next four years, after the repurchase.

I welcome any other recent examples, especially any that eclipse Home Depot's 28% of market cap.

Thursday, July 5, 2007

Scotiabank & brian acker

You may have noticed that I recently added Bank of Nova Scotia (BNS) to my list of 'cheap' stocks, which I evaluate on my watchlist. These are stocks that are currently trading significantly below my fair value estimate. BNS is trading below $52 per share and my fair value estimate has recently been revised to north of $58. In my opinion BNS is the most attractive Canadian bank right now on valuation. Unless BNS's eps growth rate slows significantly over the next few quarters and/or years, I believe today's price is an excellent entry point for a mid to long term hold. I may start a position in BNS soon if the price stays flat or declines at all from here.

One of the guests that appears regularly on BNN is Brian Acker from Acker Finley. Brian is one of the guests that I enjoy most, as I find his 'no-nonsense' valuation based look at large cap companies makes sense, and is easy to understand. I employ a similar 'model price' based method, with some more qualitative research, when I evaluate companies on my watchlist.

Coincidentally Brian has just recently added BNS to his top holdings in his Select Canada Focus fund for July. Brian has taken a large 7.9% position in BNS just this month. Recently as well he has added a BMO position which he as boosted to 8.3%. Check out Brian's website for his other top Canadian and U.S. holdings which are updated monthly in the bottom right corner of the homepage. http://www.ackerfinley.com/

Wednesday, July 4, 2007

an investment in my home

I am currently in the process of making the largest investment I have ever made in my home, aside from my down payment when we purchased the house. I am putting in a stamped concrete step, wide walkway, and back patio in place of an old deck that I have recently removed that existed when I purchased my house about two years ago.

This coloured, natural looking stamped concrete work is costing me $3,816 after tax. This addition will no doubt add much convenience and enjoyment to our every day lives during the non-winter months.

The question is though; how much value will this add to my home?

When updating my home's worth for the month of July, on my July 15th net worth statment, how much should I increase the value by on my balance sheet? I like viewing expenditures as investments, it helps me feel better about spending my money.

I wonder if there is a resource (website, etc.) out there, were they give you a percentage payback on home projects such as this. For example, does putting in a concrete feature in your home landscape like this add 100% of it's installation value to the value of your home, or is it more like 150%, 200%, or even 300%.... I remember seeing something like this when I bought my house, but I don't recall where...