Thursday, February 28, 2008

tfsa bonanza

I'm sure the majority of my readers have learned about the new financial instrument that the Canadian federal government has announced in their budget; the TFSA (or 'Thank the Feds' Savings Account), aka Tax Free Savings Account. For those of you who would like to know more about these new accounts that will be available starting in 2009, I'm going to refer you to the clever minds that I read on topics like this:

Mike From Four Pillars, The Benefits of Tax Free Savings Accounts
Canadian Capitalist, Tax Free Savings Accounts
Financial Jungle, Tax Free Savings Account
Million Dollar Journey, Federal Budget 2008 Tax Free Savings Accounts (comments)

If you read these 4 posts, they'll provide a pretty good primer on the TFSA. For those of you who are either really bored, or really excited about the TFSA, you could also read the comments attached to each post, which tend to spark ideas and ideas for further discussion.

After having a few days to digest the TFSA, I do feel that it is a huge positive for financially aware Canadians. The trouble is that many Canadians are not very financially aware, and in that respect the TFSA will turn out to be yet another instrument that is beneficial, but underutilized (a la RRSP).

Will We TFSA?
For our situation and goals, starting in 2009 I will maximize my wife's and my TFSA room ($10,000) every year going forward. Considering our current investing strategy and activity in a non-registered account, by not utilizing the TFSA to it's maximum I would be essentially choosing to pay tax our investment gains on that $10,000 portion. Looking at it this way, I really have no choice but to utilize the TFSA to its fullest. As previously mentioned we do both contribute quite a bit to RRSPs, however we emphasize non registered investing for reasons mainly for the purpose of flexibility and availability of capital. The fact that we'll be using the TFSA will affect goal #4, I will have to sum up the total value of 3 accounts now to track progress toward goal #4.

Wednesday, February 27, 2008

free money? no thanks

I think I've mentioned before that I participate in my company's defined contribution pension plan. The way the plan works is outlined below:

My Company
  • 2% of my salary regardless of my contribution
  • 4% of my salary matched to my contribution

What this means is that even if I didn't contribute anything to my Registered Retirement Savings Plan (RRSP) my company would kick in 2% of my salary. My company will also match the contributions that I do make up to 4% of my salary.

For example if I decide to contribute 5% of my salary into my RRSP out of my own pocket, my company will then contribute 2% (automatically), and 4% to match me. Therefore I'll end up with a contribution of 11% of my salary. Since my company is kicking in 6% out of this 11%, I am essentially starting out of the gate with an investment return of a whopping 120%

A recent survey by Sun Life Financial found that 1 in 5 people who have access to this type of program don't participate. About 40% of employed Canadians have access to this type of program, but only 80% participate. What that means essentially is that 1 in 5 people are saying 'no' to free money. Reasons for this varied from no desire to, to no money to spare, but the weirdest reason was the following "they preferred to invest on their own". I would be interested to know what these folks were investing in on their own that was worth passing up a guaranteed return of 25% to 150%, before the money is even invested.

Monday, February 25, 2008

household savings rate feb '07 update

The last time I updated our household savings rate (HSR), (which is the amount of money we save for investments, as a percentage of our after tax income), was on September 30, 2007. By 'investments' I am specifically referring to my non-registered portfolio, my RRSP, my wife's RRSP, and now my son's RESP. Back then we were saving about 36% of our net income. At that time my wife and I were both working away at full time jobs. When our entire mortgage payments were thrown into the 'saving' category our HSR was 51% of net income.

Fast forward to the present day where my wife is taking a government allowance each month, maternity leave, and I am still working full time.

Here are the figures for the last 2 months:

January, 2008 --- HSR = 38%, HSR including mortgage = 58%
February, 2008 --- HSR = 44%, HSR including mortgage = 63%

Also, Goal #1 has been met for both months, as we've now saved $1,388 for our non-registered portfolio for the month of February.

I am extremely pleased with these savings rates. The improvement over late last year might have to do with a general mental attitude to spend less since we are earning less. Another explanation could be the actual reductions in our day to day living costs that come along with caring for a baby.

Sunday, February 24, 2008

my Walgreen mistake

As many readers of the moneygardener know I have a long position in U.S. drugstore chain Walgreen (WAG). I first bought shares in Walgreen on January 29, 2007, over one year ago, when the stock was trading at around $45. In October WAG announced a bad quarter, and investors dumped the shares hard. The day of the dramatic drop I actually doubled my position in the stock to average my cost down. This was a mistake!

Was this a mistake because Walgreen is a poor company, with a sketchy future? Absolutely not. I still believe shares of Walgreen should be a phenomenal investment long term. So why was averaging down on the day of that dramatic 15% drop ($47 to $40) a mistake?

The reason I believe this was a mistake, but a mistake I will learn from is:
  • This trade exhibited my lack of patience, as an investor

Why I thought I needed to average down so quickly when they announced that weak quarter, is a mystery when one looks back at it now. Yes hindsight is 20/20 but, in reality, I made the trade in fear that WAG would bounce back up to $43 or $44 very quickly, when investors came to their senses. It showed overconfidence on my part that I thought I knew more than the market. No one becomes enamoured with a good growth stock, just after they report flat earnings. In reality I had months to watch the stock and average down. I've been kicking myself over the past few months as shares of WAG have drifted down to a low of $32.50. I could have got them 19% cheaper than my averaged down price, if I could have shown some patience.

  • Why catch a falling knife when you can buy a stock on the rise later?

The interesting fact is that what I thought was such a great deal at a 15% discount at $40/share back in October, has been down to $32.50 and has now bounced back to today at over $37. It is my belief that Walgreen has now bottomed. If I would have just waited until all the pessimism was wrung out of the stock, even if I didn't catch the bottom I could have bought it today 8% cheaper, and on the rise, instead of reaching for that falling knife.

The good news is that over time, this should all be water under the bridge as I expect my shares of Walgreen will appreciate smartly over time. I want to try to learn from experiences like this as I continue on my quest to buy great companies, that pay growing dividends, at reasonable prices.

Thursday, February 21, 2008

bank dividends braking or gearing down?

Robert Sedran, an analyst from National Bank Financial, writes about the possibility of Canadian banks putting dividends on hold. Specifically Royal Bank (RY), TD Bank (TD), BMO (BMO), and CIBC (CM) may forego dividend increases this quarter as their profits decline, he writes. He goes on to say that Canadian banks typically raise dividends twice per year, but they may postpone increases because average profits before one-time items should be down about 1.4%. He will view any increases as a bullish sign.

It will be very interesting to see what comes to pass here. Canadian banks have been raising dividends at fabulous rates over the past 5 years. No doubt that the operating environment for these banks has softened. The capitial markets, wealth management, loans including subprime, and the general economy do seem soft currently when compared with the last few years. These banks in the past have all shown that they can continue to raise dividends and average out making more money on a year to year basis even in tough economic times. Fee-based revenue and retail banking probably really prop them up in poor times.

Royal Bank (RY) for example had a target pay out ratio (dividends paid divided by earnings per share) in 2007 of 40-50%; they ended up coming in at 43%. For 2008 their target remains at 40-50%. As you can see there is a little wiggle room in those numbers. Earnings can be flat, while dividends continue to grow, and this could continue as long as their outlook remains so that the pay out ratio comes back down into the desired range. Bank of Montreal (BMO) on the other hand may be getting close to the top of their targeted range, especially when you include recent one-time items; their targeted range is 45-55%.

This analyst's viewpoint and comments are indicating that he believes the '2 times per year' dividend raising habit may be lost for this year for these 4 banks. He does not seem to be doubting an annual raise all together for the banks.

In a separate article, analysts doubt Bank of Montreal (BMO) will raise dividend at all in 2008.

Wednesday, February 20, 2008

baby savings

The birth of a child is a wonderful thing, but it can also be a wonderful thing for your finances. Keeping in mind that a dollar saved is worth much more than a dollar earned, here are a few of the unexpected lifestyle-related cost savings that we've realized since our son was born over a month ago.
  • We're no longer supporting OPEC. Months before my son was born our typical monthly gasoline bill was approximately $250 - $300. Our last two bills were $140, and $40 respectively. We actually went through one full tank of gas in one month.
  • Dinner and a movie? How about take out and Rogers On Demand.
  • Where should we go on vacation this year? The closest I'll actually get is the Sandals commercials, which I do enjoy....

Funny, these three initial items all have to do with the fact that 'We don't go anywhere'.... I didn't really fully realize this when drafting up the maternity leave budget spreadsheet; go figure.

I have a feeling there will be more to come on this....

Tuesday, February 19, 2008

'step away from the bagels'

Just when things seemed like they couldn't get any worse for Canadian grocery retailer Loblaw (L), they make a few startling announcements. I actually bought and sold Loblaw before I began this blog. Loblaw is the only stock that I have ever completely sold out of. The reasons I sold the stock were many, including the company's poor outlook and direction.

Some of the information released by Loblaw today was confounding and really shows the weakness of this company right now in my opinion.
  • Loblaw said they're trying to tackle the 1 Billion dollar problem of goods disappearing from their stores because of theft or mismanagement, by weeding out prospective employees with criminal records, while trying to reduce employee turnover by offering up a 10% employee shopping discount.

---- Wow, I don't know where to begin....Loblaws 2007 revenue was about 30 Billion. So 3.3% of their annual revenue was simply being lifted from their stores, or otherwise disappeared. This surely shows poor management. Never mind Wal-Mart, Loblaw's own staff is quite literally eating their lunch.

---- Hiring employees with criminal records might have been a bad idea from day one. Ya think..?

--- I appreciate the attempt to have their employees as customers, but is a 10% shopping discount going to really reduce turnover? Perhaps it might keep a few employed there, but I'm not sure Loblaws can take that kind of margin hit.

Sunday, February 17, 2008

profit from canadian financials

Stocks representing the Canadian financial services sector have really been taken down lately in the midst of the U.S. credit crunch and concerns about the weakening U.S. economy's affect on Canada. The Canadian economy has been firing on all cylinders for a few years now, and the market seems to be anticipating a slowdown in activity in Canada due to the weakness of our largest trading partner to the south of us. iShares XFN, an ETF that tracks the Canadian financial sector is down 12% in the last year. So far, in general, there has not been a real drop in earnings growth for these financial services firms, although it is widely expected by investors and by the companies themselves.

A drop in earnings growth has probably been priced into many of these banks, wealth managers and insurance firms, and consequently they are now offering up some pretty hefty yields. The yield is the percentage of your invested dollars that the company pays you annually, as a shareholder. Many of these companies have long histories of dividend increases, which can really benefit a shareholder in the long term, as one recieves an ever-increasing stream of cash. Many of these companies have increased their dividends paid to shareholders at compounded rates in the 7-12% range long term. This type of annual raise really trumps the typical 3-5% raise in employment income that one might expect slaving away at a 9-5.

Where to put your money? If you have a hoard of cash that you won't be needing for at least 3-5 years then why use a saving account where your capital just gets eaten up by inflation, and the income you receive gets taxed accordingly? Dividends from Canadian corporations are taxed less than all other forms of income. The income you'll recieve in the form of dividends from these firms is only half the story, as in the long term you should also garner some capital gains from selling the stocks.

Selected Popular Savings Account Interest Rates in Canada
ING Direct 3.65%
President's Choice Financial 3.75% (balance over $1,000)

Some Selected Canadian Financial Institution Yields on Common Stock
Bank of Montreal (BMO) = 5.2%
Royal Bank of Canada (RY) = 4.0%
Bank of Nova Scotia (BNS) = 3.9%
IGM Financial (IGM) = 4.4%
Great West Lifeco (GWO) = 3.7%

Friday, February 15, 2008

buying the manager, not the product

At the market open this morning I doubled my stake in Canadian wealth manager IGM Financial (IGM) at $42.52/share.

IGM shares are currently down about 33% from their 52 week high. The company announced a 10% rise in fourth quarter EPS last night, as well as a strong 6% raise in the dividend, which they've been in the lovely habit of raising twice annually for several years. IGM is currently yielding about 4.5%. Their dividend growth record speaks for itself.

Rough waters may lie ahead for Canadian wealth managers. This article from the Globe and Mail indicates that Canadian Mutual Fund Sales Are Plummeting. Count me in as part of the crowd that does not believe Canadian Mutual Fund Sales are circling the drain long term. As the baby boomers come of age in this country, wealth accumulation for the future will become more and more of a priority. The housing crisis in the U.S. only emphasizes the benefits of diversification. Those that have all of their financial eggs in the real estate basket in Canada should, and will probably look south to find an example of why to not have all of their assets tied up in bricks and mortar.

In my opinion an investment in IGM is an investment in the company's marketing and sales, and in the trust, and apathy of the customer. Most customers want to save and invest but don't want the headache of managing their own money, or researching the most cost effective method to do so. These investors (customers) don't care or know enough about investing to do it themselves. The marketing message is simple, "this is important for your life and good for you, trust your advisor and trust your mutual fund managers to steer you right for the long term." Relationships and percieved need for professional services will always trump competitive products like ETFs, index funds, etc. In the meantime, IGM will reap the ever-growing fees which seem like peanuts to the customer.

Thursday, February 14, 2008

Sun Life ups dividend

Canadian insurer Sun-Life Financial (SLF) announced today that operating earnings increased 4% in the 4th quarter to 0.98/share. Exlcuding the impact of the strong Canadian dollar, earnings would have been up 12%. Full year 2007 earnings came in at 11% over 2006 EPS. Operating Return on Equity was 14.3% for 2007, up from 13.8% in 2006. These results could hurt the stock, as they have missed analyst estimates by the amount of the currency hit.

"Our 2007 EPS growth and ROE are strong despite volatile economic conditions," said Richard P. McKenney, Chief Financial Officer. "The strength of our balance sheet enables our continued pursuit of our growth objectives."

I own shares of SLF; Sun Life Financial Purchase and life's brighter under the sun are two of the posts where I have discussed Sun Life.

Sun Life (SLF) also raised their quarterly dividend to $0.36/share from $0.34/share. This represents a 6% increase. Sun Life has increased their dividend 12.5% over the past 12 months. Here is a snapshot of SLF's recent dividend history:

2005 = $0.99/share
2006 = $1.105/share
2007 = $1.28/share
2008 = $1.42/share (assuming no 2nd increase)

This represents an annual raise compounded at around 13% over the last 4 years.

Tuesday, February 12, 2008

3M's weak dividend growth

Global diversified technology/industrial company and maker of post-it notes 3M (MMM) recently increased its dividend by 4.2%. While 3M has increased its dividend for 50 straight years, the strength of their recent increases surely leaves something to be desired. Let's have a look at the last few years as far as earnings per share (EPS) growth and dividend growth go:

2005 EPS growth = 11%, Dividend growth = 17%
2006 EPS growth = 22%, Dividend growth = 10%
2007 EPS growth = 11%, Dividend growth = 4%
2008 EPS growth = ? , Dividend growth = 4%

Consensus analyst estimates for 2008, and 2009 EPS growth are 10%, and 10% respectively. Therefore, this begs the question; why the weak dividend growth lately? Is 3M bulking up for a large acquisition? Perhaps they are just balancing dividend growth out over the long term after the fairly significant raises in 2005 and 2006. They could be simply trying to keep their pay out ratio, which currently sits around 37%, in line. I am not certain what their long term policy is on the dividend, and if they have a target pay out ratio in mind.

The company's long term track record on earnings and dividend growth must be viewed as strong, however their dividend growth rate over the last 10 years has been a little weak at less than 5%. 3M currently yields about 2.4%.

Monday, February 11, 2008

february links and updates

  • I wrote a guest post for The Dividend Guy. Check out What Makes A Stock Defensive? The Ultimate Defensive Stock. at The Dividend Guy.
  • My non-registered portfolio is yielding a staggering 4.5%, and is actually down 8.1% year to date while the S&P 500 is down 8.8% in 2008.
  • Great Scott! Financial Jungle interviews one of my dividend investing mentors.
  • So far we've saved over $600 in February for our non-registered portfolio, which puts us over 60% of the way toward our monthly goal.
  • I am also opening an Registered Education Savings Plan (RESP) account, with TD e-series funds for my son. The little fella is going to own some Index Funds before he can hold his head up...

Friday, February 8, 2008

washer fluid masters

I'm just as patriotic as the next guy, but when it comes to wading through aisles of general merchandise, and home improvement stuff, Canadian retailer Canadian Tire (CTC.A) just doesn't do it for me.

Am I alone in this thinking? Canadian Tire is a very successfull company, and so many other people seem to love the place. This utterly confuses me. To those who like Canadian Tire: why does the junk they sell fall apart on the drive home? Why, when you finally find a staff member their customer service level makes a garage sale operator seem like the concierge at the Hilton. Don't get me wrong the customer service at retailers like Home Depot (HD), and Wal-Mart (WMT) leave something to be desired as well. But what is the redeeming quality that makes Canadian Tire a destination? Their selection is poor, product quality is shabby, prices are average, and their customer service is just plain irresponsible. Yes, I'll take a 'rain cheque' please...

The Saturday flyer they dole out might as well be for a flea market, with the junk they include, but it seems to drive people to the big red yield sign like bees to honey, or more approprietly flies to sh$t. Want to ruin your Saturday; hit Canadian Tire at about 1 or 2pm. You'll see the pride of whatever town or city you live in, in their full glory. They'll likely be rifling through the bin of $4.99 travel coffee mugs that are guaranteed to leak. If you don't find them there, they'll be waiting in a 20 minute understaffed check out area with their windshield washer fluid in toe. Incidentally windshield washer fluid is, in my mind, the only product worth buying at Canadian Tire. Yes, I can always rely on them for the solution that I spray on my windshield to allow me to see out of my car, couldn't live without them.

For my American readers, just picture a cluttered big box store that is more expensive than Wal-Mart, but with less selection, and inferior customer service that is complete with an auto service centre that you wouldn't trust with your bicycle. I think they need to find their niche, is it auto accesseries, home improvement and tools, kitchen appliances, electronics or a garden centre? I'd rather them do something right than do everything wrong, but that's just me. Does this make me less of a Canadian...

Thursday, February 7, 2008

diamond shreddies & the stock market

They're finally here, recent advances in cereal technology have allowed Post to take their popular Shreddies cereal to whole new level of geometric superiority; enter Diamond Shreddies.

Has all the diaper changing driven me insane...? No actually, I do realize that the clever marketing minds at Post are toying with us on this one. Did they get your attention though?

Peception is such a major force in the stock market, it is sometimes hard to separate perception from reality. From day to day, the world changes much less than the stock market would have us all believe. This is one of the reasons I like to focus so much on real earnings and dividend growth. The stock market trades every day on perception. The perception of analysts, big mutual fund managers, individual investors, and even political figures all drive the market up and down. I want to capitalize on this perception when I can by maintaining focus on a clear, emotionless, long term strategy. Buying solid, dividend growing companies, with histories of earnings growth, in boring businesses when I deem them to be cheap based on their earnings growth record, has little to do with perception.

I'll ride this strategy all the way down into market troughs and all the way back up to market peaks, not allowing those pesky diamond shreddies to get in the way of long term growth of my income stream, an eventually my base capital.

Wednesday, February 6, 2008

watching ADP...

In the midst of this market sell off there are several stocks that have surpased their 52 week low or are bumping off that low. With a constant eye to my watch list, this is one of the stocks which has drawn my focus:

Automatic Data Processing (ADP)
For those of you who aren't familiar with ADP, they might be the people who pay you every two weeks. ADP is a provider of business outsourcing solutions. The company you work for may outsource their payroll or even their tax and benefits administration to ADP. They are also a leading provider of integrated computing solutions to several vehicle dealers throughout the world. These are businesses with very predictable cash flow, and high barriers to entry. Each of the markets and businesses that ADP operates in, globally and in the United States, are expected to grow quickly over the next several years.

ADP has been growing very quickly over the past few years and is expected to continue that growth going forward. Earnings growth in the high teens are a regular occurance for this firm, and their dividend growth has followed suit. ADP has paid dividends since 1974, and their dividend growth has been very solid. The dividend has actually doubled since 2004, and their latest increase was a very strong 26%.

The stock is currently sitting at a multi year low of $37.91. From a technical perspective though, the stock chart looks scary as it seems to have broken dow to uncharted territory. The last time this stock looked this good was back in 2003 when it traded down to $32. ADP has traditionally always demanded a premium P/E, which I believe is warranted due to the company's market position, high growth rate, strong return on equity, and low debt.

I have my eye on this one as I believe the fear of many jobless Americans has investors selling this one hand over fist. The opportune time to buy into ADP is when fears of a high unemployment rate loom. The current P/E of around 19x marks a 10 year low level. The stock is yielding 3% which is unheard of for ADP shares as well. I always get really interested when I see a big recent dividend raise coupled with a low stock price....

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Tuesday, February 5, 2008

drugs 'n dividends

The largest pharmacy chain in Canada, Shoppers Drug Mart (SC), has raised it's dividend by almost 35%. The company raised the annual pay out on the back of a 16% rise in 4th quarter profit, and same store sales growth of 3.9%. Sales of the company's private label and exclusive brands rose an astonishing 16.1%. I guess people are really buying up the 'Life' brand.

Considering that the dividend raise was double the EPS growth rate, this tells me something about the stock Shoppers wants to become. This company seems to really be putting an emphasis on dividend growth, and is trying to make themselves into more of a dividend play. Even after this dividend raise the yield is still relatively low at around 1.7%, but if Shoppers continues to raise dividends faster than EPS growth then their pay out ratio will rise and the company may attract more dividend investors as their yield climbs up to the 2.5% - 3.5% range. Perhaps the company is looking into the future and seeing the reality that they may reach the saturation level sooner rather than later, and their growth is bound to slow.

After going through the Walgreen (WAG) experience it is easy to see that Shoppers is currently sitting on a precarious valuation perch of 23x earnings. It is inevitable that the company will report a weak earnings growth quarter at some point and the stock will likely get knocked down hard. This could be a wonderful buying opportunity for long term investors, as I believe currently exists with Walgreens. You can be assured that this stock will not demand premium P/E forever, but it's always difficlult to know when it will shrink and by how much. As of right now the stock looks like a fabulous buy whenever the shares dip below $48 or so, but this is assuming that their torrid rate of earnings growth continues unabatted. Even if the P/E shrinks this entire industry has the tailwind of demographics at its back; as the baby boomers age and need more drugstore goods while they also seek convenience over price.

Personally I really like the company, and I like the industry fundamentals and outlook even better.

Here is a glimpse at Shoppers Drug Mart's Recent dividend record:
2005 = $0.40
2006 = $0.48
2007 = $0.64
2008 = $0.86 (projected)

Swift dividend growth indeed, as they have more than doubled their dividend in 3 years.

Saturday, February 2, 2008

the week that was in earnings

With all the talk lately of the U.S. possibly being in a recession, or teetering on the edge of one, I have been a litle surprised with the strength of (non financial sector) earnings. Here are some of the past week's results from companies that are on my watchlist and other widely held large cap U.S. firms:

Black & Decker (BDK) - 3% better than expected.
Corning Inc. (GLW) - 3% better than expected.
McDonalds (MCD) - 3% better than expected.
Scotts Miracle Gro (SMG) - 14% better than expected.
Verizon Communications (VZ) - met expectations.
3M (MMM) - 2% better than expected.
Dow Chemical (DOW) - 5% better than expected.
T Rowe Price Group (TROW) - 8% better than expected.
TransCanada Corp. (TRP) - 5% better than expected.
Altria Group (MO) - 3% better than expected.
Kellogg (K) - met expectations.
Kraft (KFT) - met expectations.
UPS (UPS) - met expectations.
Colgate Palmolive (CL) - 2% better than expected.
Procter & Gamble (PG) - 1% better than expected.
CVS Caremark (CVS) - met expectations.
Automatic Data Processing (ADP) - met expecations.

Friday, February 1, 2008

january, '08 blog stats

the moneygardener has been growing!

Here are the results for this site for January, 2008.

Average Unique Daily Visitors = 365 (up 21% from December, '07)
Cities In Order = Toronto, Cgy, Van., Edm., New York, Montreal
Most Popular Post = the yield effect
Most Frequent Incoming Traffic Source Blog = Canadian Capitalist
Most Frequent Outgoing Blog Link = Middle Class Millionaire
the moneygardener also reached the 100 subscriber milestone this month.

If you haven't had a chance to check out the two blogs mentioned above you should go ahead and have a look, as both blogs are excellent resources for the financially concerned. Also, if you are currently using a reader to more efficiently organize your blog visiting, which by the way I would really recommend, please remember to subscribe to the moneygardener by clicking on the orange tab on the right panel.