Friday, October 17, 2008

new to the moneygardener?

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Here on the moneygardener I write about personal finance topics including, but not limited to:
budgeting, dividend investing, saving, spending, retail ranting, planning, goal setting, observing people's habits and relationships with personal finance, risk taking, borrowing, analyzing net worth, growing net worth, childcare expenses, bear markets, oil, and of course Costco.

If you are interested in everything surrounding money, and the ongoing task of growing wealth I think you will enjoy my unique perspective.

Fortis Inc. purchase

Yesterday I initiated a position in Fortis Inc. (FTS) at $21.31, where it was trading near its 52 week low of $20.70.

About Fortis
Fortis Inc. (FTS) is the largest investor-owned distribution utility in Canada, serving almost 2,000,000 gas and electricity customers. Its regulated holdings include a natural gas utility in British Columbia and electric utilities in 5 Canadian provinces and 3 Caribbean countries. It owns non-regulated hydroelectric generation assets across Canada and in Belize and upper New York State. It also owns hotels & commercial real estate in Canada.

Why Would I Buy Fortis
Fortis fits into my portfolio in my utilities/telecom. section, being most similar to Inter Pipeline Fund (IPL.UN) in the nature of its business. Being mainly an electric and natural gas utility owner/operator, Fortis draws extremely stable revenues from it's customers. Much of Fortis' business is also regulated, which adds further stability to their revenue. Fortis has a stellar history of earnings and dividend growth dating back to 1972. Fortis is a Canadian company which pays eligible dividends, currently to the tune of 4.7% yield.

Why Now
Similar to Diageo (DEO), I feel that Fortis has been unfairly sold off during this period of turmoil in the markets. Companies that are resistant to changes in economic activity and consumer spending should be able to maintain solid earnings through these troubled times. Electricity, like alcohol, is an essential good no matter what the economy brings.

By my estimation Canadian dividend paying utility companies including Fortis and TransCanada (TRP) have been expensive stocks for a few years now. These businesses have always attracted me, but I have never been able to rationalize a purchase of these companies due to their high valuation. The recent drastic market sell off has brought these stocks back down to earth. The market panic selling and need for cash is affecting all stocks, Fortis being no exception.

Valuation By Price to Book Ratio
A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
Fortis Current Price/Book Ratio = 1.25x
Fortis' annual average Price/Book Ratio has been less than this level one time in the previous 10 years (1999 only).

Being a utility, Fortis has a significant amount of debt (Deb/Equity ratio of 1.82). Fortis also has a dividend pay out ratio as a percent of earnings of 64% showing that there is little room to raise dividends if earnings become flat for an extended period.

I have confidence that given the stability of Fortis' revenue and earnings, as well as their emphasis on growth they should continue to provide stable returns to investors for years to come despite economic conditions.

Wednesday, October 15, 2008

the golden arches raise dividend 33%

This article originally appeared on The DIV-Net on October 1, 2008

Iconic fast food chain McDonalds (MCD) has raised their dividend from $0.375/share to $0.50/share. This represents an increase of 33%. McDonalds' global sales were credited as fuel for the pay out raise. The company has raised its dividend each year since the company began paying one in 1976.

Here is a glance at the company's recent dividend history:
2005- $0.67
2009 -$2.00 (estimated)

This represents a compounded annual growth rate of the dividend of 29.5%. The stock is currently trading at around $56 and yielding about 3.6%. This company has really been executing well over the past few years. In March of 2003 the stock actually traded below $13/share. This is certainly one we all wish we had owned for the past 5 years. As a former employee I wish I had been paid in stock instead.

Monday, October 13, 2008

relax, take the longview

I'm sure as investors we've all seen the studies which indicate that over the long term we are better off being invested in the market, rather than not. Removing your money from the market for even a few days or weeks as part of an attempt to time the market can really handicap you from garnering good long term returns because nobody can predict what the market will do; and often the upward moves are quick and powerful. Case in point today as the S&P 500 index soared over 11%, the largest one day gain ever. Some stocks were up as much as 18%. The Bank of Nova Scotia was up 17.6%. This is not a penny stock, or oil and gas junior, or a hot tech. firm where large day to day swings in per share price are expected; this is Canada's third largest bank, a fourty billion dollar company.

What is happening in the stock market as well as the broader economy right now is ugly and there are real underlying issues that will take time and pain to resolve. The bottom line for me as an investor is that I don't require the money that I am putting at risk in the market for at least seven years. Due to this I can afford to brush off paper losses and take advantage of major weakness in stock prices to do some buying. The recovery is inevitable, the timing is unknowable. Corporations will continue to strive to grow earnings year after year and our capitalist world will enable them to do so over time. These same corporations will also continue to throw me growing cash in the form of dividends, to keep me satisfied as an investor in their profitable firms.

I am not sure if we have hit the bottom yet, nobody is, but one thing I do know is that many stocks are offering up much better value lately than they were months ago. Yields are up and P/E ratios are down. Many companies have earnings that are able to remain fairly stable through recessions and other market turmoil. Some companies will earn less money in the next few years than they did in the last few, but their share prices are reflecting anemic growth for the next ten years.

The point is that it really doesn't matter if we've hit bottom or not. A bell will not ring when we do, and the economic world will still look as bleak as it does now when we do. All a long term investor can do is remember that they are just that, long term investors, and continue to evaluate potential investments for purchase as they have always done or simply dump more money into the general indices, since they can buy more of them than they could last quarter. Avoid the temptation to do something reactionary with your long term equity positions to combat against the crash we saw last week. If you are not buying, consider doing nothing.

Yes, it is a giant sale on stocks, Shop Wisely For The Long Term.

Some great further reading here:
Your Retirement Income is On Sale, by Dividend Money

Try INO - Get your favorite symbols' Trend Analysis TODAY! Click Here

Friday, October 10, 2008

doubled Husky position

Yesterday I doubled my original position in Canadian oil integrated oil and gas firm Husky Energy (HSE). I bought Husky at $33.85 where it was trading at a P/E ratio of 7.0 and a dividend yield of 5.9%. This purchase likely brought Husky up to about a 6-7% weighting in my non-registered portfolio. Buying oil when the U.S., and possibly the world is going into a recession has its risks, but I believe most of those risks are already priced into this stock. At a 5.9% yield I am not concerned about Husky's 1-2 year forward earnings outlook. With their low pay out ratio they should be able to maintain the dividend if oil stays at reasonable levels. If the worst case occurs and oil tanks down to sub $60 levels for a sustained period then all bets are off, but I see the odds of the 'sustained period' being measured in years very unlikely. The world is still running out of oil, OPEC is still in the business of making money, and emerging markets continue to strive for the Western life. The race to find alternatives will only be hampered by lower relative oil prices.

Thursday, October 9, 2008

leverage use in this bear market

The equity markets are now offering up some unprecedented bargains in high quality, dividend paying stocks. I will continue to buy stocks that I feel offer exceptional value if the S&P 500 index continues to drop to (year) 2003 levels and beyond. I feel that as part of my long term strategy I have a responsibility to take advantage of massive downswings in the equity markets. I am now borrowing a very small amount of money from our unsecured line of credit, at a low interest rate, to fund purchases of quality dividend paying stocks. Aside from my attempts to time the market....I am able to claim interest paid on this loan when I file my taxes. Also, I gain the benefit of receiving the dividend income sooner, instead of later if I had waited to purchase the equities in 2009. We have established ourselves as great net savers. The saved money normally went directly into stocks (would occur in 2009), if this strategy is needed the money will be used instead to lower the line of credit balance (in 2009).

This strategy does not come without its risks, as any investing strategy does. I feel that given our current personal financial situation, age, and given the recent events in the market, the timing is ideal for such a strategy. If the S&P comes roaring back several percentage points I will likely halt stock purchases and dedicate funds to pay back the line of credit. The total quantity of leverage used will likely be modest when compared to my portfolio value.

To read an informative series on leveraged investing please look here at Quest For Four Pillars.

Tuesday, October 7, 2008

Diageo purchase

During the steep 8% sell of of the S&P 500 this past Monday I picked up shares of global branded alcoholic beverage company, Diageo (DEO) at $58.61, where they were off 10%. Diageo is the company behind products like Guinness Stout, Crown Royal Whiskey, Baileys, and Smirnoff Vodka. Mmmm.....

At a 5.4% yield Diageo was hard to pass up. To read a brief post about why I bought the stock now, please visit The DIV-Net and read my regular Wednesday post titled 'Diageo, Happy Hour On The Cheap'.

For more great information on Diageo from The DIV-Net, check out Dividend Growth Investor's post from August 22, titled "Diageo Dividend Analysis". I'll likely talk further about why I like Diageo in future posts on the moneygardener. Diageo now makes up 3% of my portfolio.

B of A gets the scissors out

Bank of America (BAC) finally cut their dividend by 50% which saves about $1.4 B per quarter. I've talked a lot on this blog about whether or not BAC will cut their dividend and now they finally have. The credit crisis has obviously got to a point that is much worse than anyone had imagined. BAC recently purchased Merril Lynch and they're also paying out a lot of money for bad loans, lawsuits, etc. related to the Countrywide Financial acquisition. These needs, along with the fact that the credit crunch got worse than expected with many casualties, were probably paramount in the decision to cut the dividend. My initial bet that BAC would not cut the dividend as one of my reasons for purchase, was wrong.

Having a firm that you own cut their dividend is probably the worst thing that can happen to a dividend investor. In this case because BAC was such a small part of my portfolio (about 3%) this dividend cut barely affected my income from investments. Another factor that is really offsetting its affect is the appreciation of the U.S. dollar recently versus the Loonie. The dividends that all of my U.S. holding are paying me have become more valuable over the past few weeks. I will update my income from investments very soon.

I am holding on to my BAC shares despite the dividend cut for several reasons:
  • Now would be a terrible time to sell BAC, and if I were to sell I'd sell into strength
  • Because of all of the failures and consolidations in the U.S. financial industry due to the credit crisis Bank of America looks like it will turn out to be bigger and have more market share, talent, and influence in the global market which looks positive for the company going forward
  • Bank of America is currently the bulk of my exposure to financials outside of Canada which I intend to maintain exposure to
  • I believe the company still values dividend growth and should begin to re-grow the dividend after credit and economic conditions stabilize

Saturday, October 4, 2008

recession pricing

With the S&P 500 index now re-visiting levels not seen since 2004, it is no surprise that several great companies with long histories of earnings and dividend growth are getting down to some notable lows. This massive sell off is not being felt the same across all sectors. Not surprisingly consumer staples seem to be holding up very well as recession fears loom. Consumer staples are typically products that people will continue to buy in hard times. Major selling is certainly at hand for companies operating in sectors that are directly affected by the broader economy in general and consumers discretionary spending.

Typically during such a steep, quick sell off like this it is wise to avoid 'catching a falling knife' when attempting to buy stocks at good value. Easier said than done, but one should try to wait until a particular stock stops going down and meets some support partnering with large volume before buying. Here are a few examples which I feel are notable and possibly worth taking a look at now or at some point soon. I am keeping a close eye on the following, and I'll likely make a purchase soon based on a list of stocks which includes these 4. Ideally equity investors should have a time horizon of more than 7 years and ensure they are properly diversified.

3M Company (MMM) - The diversified technology company which has paid a mostly rising dividend since 1977 is trading at levels not seen since July of 2003. Yield = 3.1%

Walgreen Company (WAG) - The U.S. drugstore chain with a stellar history of earnings and dividend growth is trading at levels not seen since February of 2003. Yield = 1.6%

Diageo PLC (DEO) - The maker of branded alcohol who has grown their dividend at a compound annual growth rate of 8% over the past 10 years is changing hands at levels last seen during April of 2006. Yield = 4.8%

General Electric (GE) - The diversified conglomerate with an outstanding record of earnings and dividend growth is trading at levels only seen briefly in February of 2003. Yield = 5.8%

Of course there are several more examples in the stock market today. You might call this the start or the end(?) of recession pricing.... Investors out there: What stocks are getting your attention lately?

Wednesday, October 1, 2008

do not call me

The Canadian National 'Do Not Call' Registry went live in Canada yesterday and I managed to add our home phone and cell phone to the list last night. I have heard that the system has been flooded so its operation has been hit and miss. After you register it will take about one month for the calls to subside.

To add your phone and fax number(s) to this registry and avoid annoying telemarketers go to:
'WhereDoesAllMyMoneyGo' who features a helpful post on the topic.