Monday, March 31, 2008

yellow pages - ylo.un

The buggy whip, the paper map, the VCR, the phonebook....which one of these is not like the other one?

Fellow blogger Middle Class Millionaire recently posted about why he believes Yellow Pages Income Fund (YLO.UN) is a 'don't buy'. Let's just say MCM and I agreed to partake in a little 'Stars and Dogs'. I am a holder of YLO.UN, and this is why I am quite comfortable holding, and would rate the stock as a 'buy' for an income oriented investor.

Let me start by saying that when I first heard of Yellow Pages as an investment I immediately thought about the flight to the internet and the death of YLO; that is until I actually did some more thinking and reading on it. Last year when I initiated a position in Yellow Pages Income Fund (YLO.UN), I explained how my decision to buy YLO was rooted in the stability of their distributions. S&P rates YLO's distributions as SR-2 / Stable, which is the second best rating on their scale which ranges from SR-1 to SR-7. Is there any risk that this cash cow will stop the steady stream of cash they deposit in my investment account each and every month? I think not.

You can read my post linked above for the details on why I like Yellow Pages as an income investment. For this current post I'd like to point out what I think are the key points that make this company an excellent hold for anyone looking for income in their portfolio:
  • print directory organic revenue & earnings are growing mid single digits every quarter
  • online revenue has quietly grown to make up 10% of total directory revenue
  • twenty somethings with thai food cravings living in large urban centres make up a small proportion of canadian households
  • fifty something married couples who occasionally need a plumber and really love this new 'internet thing', make up a large proportion of canadian households
  • small business makes up a large proportion of the economy; given the choice to cut costs I believe their Yellow Pages ad would be the equivalent of my Union Gas hookup
  • 56% of YLO's directory advertisers place an ad on their online directory as well
  • Yellow Pages, Autotrader, Canada411 are all great brands with the former two being virtual monopolies
  • the internet is still not a reliable source for organized, complete local information
  • they are partnering with Google in several creative ways, which is wise
  • the company's latest earnings releases have been very solid and management is confident about the future, and their future ability to maintain distributions going through the conversion in 2011

The migration to online has obviously not occurred yet. For evidence of this just have a look at YLO's recent earnings statements. Is the migration expected to happen this year, or maybe next, or maybe in 2010? It is silly to think that a switch will be flipped and instantly electricians, windows and doors, and good Chinese restaurants will be sourced online by the masses. Yes, some will, but I am online frequently, have wireless internet in my home, operate a blog, and am under 30 and if I need a locksmith I'm reaching for the yellow book. What does that say..?

This all being said, there is likely better spots to put your money long term if you are looking for growth of capital. I have no doubt Yellow Pages can continue kicking out cash for a the foreseeable future, however I do believe that their business model has some headwinds in front of it which include the very slow migration online, as well as increasing competition online. I believe the yellow pages directory book will exist for several more years, and the company will continue to diversify itself online. I have faith that the management of Yellow Pages is strong and knows how to make money. They'll continue to leverage these brands and probably acquire new ones that fit their current business plan.

The bottom line is that I don't see the phonebook going away anytime soon. One can not compare Canadian Tire's decision to stop printing a catalogue to Yellow Pages directory business. This is a one-off catalogue from a second rate retailer, as compared to the go to source business and telephone directory for much of the population.

Sunday, March 30, 2008

vancity calculators

I wanted to point out a great personal finance resource that I've discovered online. Vancouver City Credit Union has some wonderful graphic personal finance calculators in their my money section under the 'tools and calculators' / 'online calculators' tab. The calculator I have linked above is called 'Savings Calculator';

Consistent investments over a number or years can be an effective strategy to accumulate wealth. Even small additions to your savings add up over time. This calculator demonstrates how to put this savings strategy to work for you!

There are actually several calculators on the Vancity site including mortgage, loan, net worth, and debt calculators. Obviously there are several of these type of finance calculators scattered all over the internet, however I've found a few of these to be a step above. Don't have time to check them out right now? Not to worry, I am going to include a link to these Vancity calculators under my 'useful links' section on the right panel of the moneygardener.

Saturday, March 29, 2008

latest watchlist additions

I briefly described the process that I employ for selecting stocks for my dividend growth watchlist back in June of 2007. I maintain this list of dividend growth stocks that I tend to watch regularly on an Excel spreadsheet, complete with the prices at which they get my attention for a potential new position. Qualifying for the list is difficult, and only the cream of the crop end up on my watchlist and stay on my watchlist. A high degree of consistency in earnings and dividend growth is usually required. Consistency gives me better faith in the company's future, and at the same time allows me to better determine my buy price for the firm.

Here are two of the latest additions I've made to my watchlist. I'll elaborate on these three companies on separate posts in the future.

The Clorox Company (CLX) is an $8 Billion dollar consumer products firm that manufactures and markets brands such as Clorox, Armor All, STP, Glad, and Brita. Clorox recently acquired natural products company Burt's Bees and is very recently marketing a line of environmentally friendly cleaning goods called Green Works.

United Parcel Service Inc. (UPS) is a $75 Billion dollar package delivery and supply chain management company. Package delivery is a very easy business to understand, with very high barriers to entry, and lots of room for different added value services. In supply chain management, UPS is the industry leader and at the forefront of the continuing trend of globalization.

Thursday, March 27, 2008

canucks still spending

Perhaps surprisingly Canadian consumers are still shopping. In January retail sales in Canada jumped 1.5%; this came after a revised 0.8% advance for December, 2007. This apparently reflected higher spending on cars, clothing, and furniture. The market is interpreting this as unexpected good news for Canadian retail stocks. Take a look at their performance in the last few days.

5 day returns:

Canadian Tire (CTC.A) = + 5%
Shoppers Drug Mart (SC) = + 6%
Reitmans Canada (Ret.A) = + 12.5%
The Brick Inc. Fd. (BRK.UN) = + 8%
The Forzani Group (FGL) = + 4%

XIC (ETF for Canadian large caps) = + 0.7%

Tuesday, March 25, 2008

asset allocation update

I thought I'd take a post and update my asset allocation in my non-registered portfolio. Being a dividend growth portfolio it is no surprise that it is currently 34% financials. Several financial companies offer exceptional dividend growth histories, and sound, stable business models. Also it is not a surprise that my portfolio is very weak on commodities. Commodity producing firms in general do not really fit into my system of investing in dividend growing stocks when they are priced attractively. Companies whose earnings per share depend on the fluctuating price they are able to garner from their wares in the market tend to have less predictable earnings growth and thus less predictable dividend growth.

Currrently I have 64% of my capital invested in Canadian companies, while the remaining 36% resides in U.S. firms. See my asset allocation across sectors below:

Sunday, March 23, 2008

a very simple move

Back in August of last year in my 'how i manage day to day' post I explained the habits that I employ which I feel allow us to save about 40% of our net income. I wanted to expand on #4 on this list which was 'MAKE SAVING YOUR FIRST PRIORITY'.

Actually making saving your first priority for your money is not an easy task. Life is filled with ways to spend money and often these seem more attractive than saving and investing for the long term. Changing your mentality to see the long term benefits of saving and investing is a state of mind, and is not accomplished overnight by most. The benefits of saving and investing a large portion of your income are numerous. It is important to remember that having the wherewithal in the future to purchase material possessions is only a part of the benefit. Another part, which some might consider the key part, is financial security and freedom. By financial security and freedom, I am referring to that mental state of mind where money no longer becomes a constant stress and worry in your life. I think many people overestimate the amount of capital that it would take for them to achieve this financially free state of mind. If you have the choice right now at this moment whether or not you want to stress about money for the rest of your life, why choose stress?

Literally making saving your first priority is an extremely easy task. Blogger squawkfox points this simple fact out best in the post 'I have zero debt. Am I weird?'. When I read #7 of squawfox's list, 'MOVE THE MOOLAH' I realized how important this is. squawkfox and I share this habit as one of they key's to our saving strategy. It is so simple it's almost silly, but I hold 'MOVE THE MOOLAH' as absolutely essential to saving 40% of our take home pay. It is as easy for me as the following robotic procedure I go through once every two weeks or so:

My 'MOVE THE MOOLAH' Procedure
  1. Get Paid (X). This is where the money comes from.
  2. Sum up your expected expenses for the next 2 weeks (Y). If you need help look back at your spending from a previous 2 week period.
  3. Insert Buffer. To allow for the unexpected, include a small amount of money (Z) in your expected expenses.
  4. Perform this calculation $X - $Y - $Z = $S (Savings)
  5. Simply transfer $S into some type of savings or investing account. Usually this involves typing in dollar values, and clicking a few times.

I really only started doing this habitually about 2 years ago, but it has really paid off. It seems that when I jettison the money off to an investing account quickly, it feels like I never had it. All of this extra money is not sitting in my chequing account making me feel rich so that I can subconsciously buy more stuff. Instead it is actually making me rich by compounding untouched for years.

To quote squawkfox: This is really simple. Every time I get paid, I move a portion of my moolah to a savings or investment account. I move my moolah every pay, without fail. Some people call this “automatic savings”. I just call it common sense. I figure, why I am working so many hours if I have nothing to show for it at the end of the week! Moving my moolah every pay is the significant reason why I am finally sound.

I have to credit squawkfox, which happens to be a great blog, for the phrase 'MOVE THE MOOLAH' which is so simple yet so crucial to my financial strategy.

Thursday, March 20, 2008

my first million will be the toughest

My investing history didn't need to be so brief...after all your first million is the toughest.

If you would have asked me what a dividend was while I was in my third year of university I likely would have given you a blank stare. Through conversations with a friend of mine during my latter years of university I became interested in personal finance. When I graduated in 2002 I quickly joined the working world as I needed to pay the rent. Around this time I began to have conversations with people in my life who had an interest in mutual funds, stocks, and the markets. Acting on my new found interest in these topics, as well as a realization of the power of compound interest, I plunked down a hard earned $500 and bought a Canadian Equity mutual fund.
Even though I was earning a very meagre salary, and I had a $4,500 outstanding student loan I felt I needed to get involved and participate in the economic power of corporations growing my capital for me. In hindsight I wish I would have stumbled upon the world of the stock markets, and personal finance much, much earlier. I strongly believe that there should be a mandatory personal finance class in high school or even elementary school. Knowing what I know now, even though my resources were very tight in my high school and university days I might have skipped that extra case of beer or that new golf shirt and bought some shares of Royal Bank of Canada (RY) instead.

Tuesday, March 18, 2008

the last temptation of BMO

The ongoing credit crisis has unearthed some rare gems for investors, but whether some of these gems turn out to be fools gold remains to be seen. It is no surprise that one of these opportunities has appeared in the Canadian banking sector, as these stocks lie near the heart of the ABCP fall out and the credit crisis mess. BMO's share price has nearly been chopped in half since around this time last year. Due to this massacre in share price, BMO's yield has crept up to a staggering 7.2%. This yield level is absolutely unprecedented for a Canadian bank. You could buy BMO shares today and receive 7.2% annually back on your investment even if the stock flat lined for years. Combine this with the favourable tax treatment of dividends for Canadian residents and many would be satisfied with that investment return. Of course this is assuming they don't cut their dividend. That unfortunately is the $700 million dollar question. If BMO did happen to cut their dividend in half, they could instantly have about $700 million extra to work with annually. Whether the bank feels they would need this capital to compensate for write-offs or investment losses remains to be seen. There are also several other factors at play including the eventual true value of written down assets, as well as the banks reputation, culture, and dividend policy.

Several months ago BMO was being used as an example of a stock that one could buy by employing some leverage in a Smith Manoevre type strategy by using a home equity line of credit (HELOC) to essentially make mortgage interest tax deductible. People saw BMO shares as a prime candidate for this type strategy given their high, stable yield, and dividend growth history. At this time BMO was yielding around 4 - 4.5%. It is interesting to look back at this now. Are all of the pieces of the puzzle still in place for BMO as a candidate for leveraged investing? The yield is certainly high, there is no arguing that, but I'm not sure how stable it is, and I don't have the utmost confidence in their ability to grow dividends from the current level in the short to mid term. This just goes to show how quickly and dramatically change can occur in markets and thus stocks. If BMO cuts their dividend dramatically you would have to say this is a worst case scenario for those who bought it last year in leveraged accounts. Not only do you lose precious income that would have gone to interest expense but the value of your investment will have roughly coincided with the dividend drop. For those who factored many possible negative scenarios into their strategy in the planning phase, and assuming they've diversified appropriately they will likely still stand a good chance of mid to long term success using this strategy.

So should we buy BMO now? Should it be bought now that the yield is 7.2% and maximum negativity in the name seems to be close at hand? I would argue, like many others have, that the yield is a bright red flag indicating a warning of a dividend cut. If a high dividend yield is the only thing attracting me to the stock, then I don't want it in my portfolio. BMO's recent performance and short term outlook are murky at best, and I don't really think the bank has much going for it when compared to their Canadian competitors. Currently there is no shortage of attractively valued Canadian banks with reasonable pay out ratios, strong recent performance, good management, and solid balance sheets. A yield over 4% in BNS, RY, and TD is nothing to sneeze at when you consider some of their other fundamentals, outlook, and market position. All three also look reasonably valued using earnings growth models.

Although some would say that the most successful long term strategy has been to just close your eyes and buy the current worst performing Canadian bank. You can judge this buy simply buying the one with the highest dividend yield. For me, this just doesn't feel right....I'd rather keep my eyes open...

Sunday, March 16, 2008

the numbers work for GE

I took the recent weakness in share price of dividend growing General Electric (GE) as an opportunity to add to my position in the company. This past Friday I bolstered my position in the global conglomerate, which builds jet engines and owns the media network NBC. For most of my general thoughts on why I believe GE is a great investment, see my post titled GE, past success, future potential.

Stock valuation-wise here are some of the key points that make GE so attractive at these levels. Let's look at GE over the last 5 years, since 2003:


  • In 2003 GE traded between $23 and $33 per share.
  • GE's EPS was $1.40
  • In 2003 GE paid a dividend of $0.19 / share.
  • GE's dividend yield ranged from 2.3% to 3.3%
  • In 2003 GE's Return on Equity (ROE) was 17.7%

The Key Fundamentals of Growth Since 2003

  • GE has grown it's annual EPS consistently from $1.40 to $1.59 to $1.64 to $1.86 to $2.20 in 2007.
  • GE has grown it's quarterly dividend consistently every year from $0.19 to $0.20 to $0.22 to $0.25 to $0.28 to $0.31 currently.

GE is currently cheaper than it has been at any time in the past 5, maybe 10 years...

5 years later, I bought the stock at $33.47 this past Friday. Should I have been able to get the stock this cheap given it's earnings growth and dividend growth over the past 5 years?

  • The stock currently yields 3.7%, easily right near a 5 year high, and there is no reason to think GE won't continue raising it's dividend at swift rates in 2008 and beyond.
  • GE's Return on Equity in 2007 was 19.4%.

In Summary

So why is GE such an attractive buy today? It is all in the numbers. Today vs. 2003 - GE is earning $2.20 vs. $1.40 per share (36% more), GE is now paying $0.31 vs. $0.19/share in dividends (40% more), GE is currently more efficient at generating profits, showing a ROE of 19.4% vs. 17.7% in 2003. All this for a 47 cent premium on it's 2003 high trading price, giving the shareholder 3.7% of his/her money back annually, whereas in 2003 he or she would have received only 2.3% back as yield on their investment in GE. While these numbers are compelling to show GE's relatively attractive valuation, some might see the recent enthusiastic insider buying by CEO Jeff Immelt as a bullish sign as well. While Jeff should have a unique view of where GE is going in the next 2 years, he might just be buying because he too has looked at where GE has come from and realized the company is cheap relative to it's history.

Saturday, March 15, 2008

net worth update march, 2008

Results for the 2 months ended March 14, 2008.
  • Debt/Asset Ratio was flat at 0.54%
  • Net Worth moved up 0.9%
  • Total Assets were flat
  • Total Liabilities decreased 0.7%
  • House Value/Total Assets remained flat at 73.0%
  • Non-Registered Portfolio grew 1.2%

What a terrible 2 months for the stock markets! The S&P 500 index was down 9%, and our non-registered portfolio has returned negative 10.3% year to date in 2008. As mentioned our son's RESP account was added into the fold this period, so it contributed to assets and net worth accordingly. Every investment account we own with the exception of our non-registered portfolio was in negative territory for the period in absolute terms. The fact that we continued to keep our head above water with our asset, and net worth numbers given the rough markets, is a good indicator of how well we are still saving despite our reduced income.