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Tuesday, June 30, 2009
Monday, June 22, 2009
guest post - Best Buy's been a 'best buy'
The following post was written by Saj Karsan. Saj regularly writes for Barel Karsan, a site dedicated to finding and discussing value investments, and applying logic to investment decisions (as opposed to falling prey to psychological biases).
In an "efficient market", all stocks are fairly priced by the market. If the US stock markets are efficient, and many finance industry professionals believe this to be the case, one cannot generate index-beating returns except through luck. However, if we were in an efficient market, it seems hard to believe that stock prices for even the most stable of companies should fluctuate so drastically from year to year and even from week to week. Yet that is exactly what happens.
Consider Best Buy (BBY), a US-based multi-national electronics retailer. It has generated consistent returns year after year, and has a low debt to equity ratio resulting in minimal financial risk. Yet its stock price has fluctuated dramatically, offering astute investors the opportunity to achieve enormous returns.
Below is a chart depicting Best Buy's annual return on invested capital (ROIC) contrasted with its stock price:
While ROIC has been predictable and consistently range bound for the last several years, the stock price has been anything but. It seems hard to believe that the market is efficiently pricing this security when its price can fluctuate wildly in relatively short periods of time while the company itself generates predictable earnings on capital. For example, if the company is worth X amount in early 2000, how does it become worth just one quarter of this amount 3 months later, and then three times this amount six months after that?
More recently, three months ago the market valued Best Buy at $7 billion, but now values it at $16 billion! Investors who recognized the mispricing have seen returns of over 100% in a 3 month period!
We've also seen other examples of this phenomenon: we've looked at graphs illustrating wild fluctuations in the historical P/E ratios of Coke (KO) and Walgreens (WAG) (a moneygardener favourite), for example, which have allowed value investors to buy in at tremendous discounts.
Value investors willing to put psychological bias aside and instead invest at the height of the market's fear can indeed achieve above average returns. If this topic interests you, consider subscribing to the Barel Karsan feed.
Disclosure: Author owns a long position in BBY
In an "efficient market", all stocks are fairly priced by the market. If the US stock markets are efficient, and many finance industry professionals believe this to be the case, one cannot generate index-beating returns except through luck. However, if we were in an efficient market, it seems hard to believe that stock prices for even the most stable of companies should fluctuate so drastically from year to year and even from week to week. Yet that is exactly what happens.
Consider Best Buy (BBY), a US-based multi-national electronics retailer. It has generated consistent returns year after year, and has a low debt to equity ratio resulting in minimal financial risk. Yet its stock price has fluctuated dramatically, offering astute investors the opportunity to achieve enormous returns.
Below is a chart depicting Best Buy's annual return on invested capital (ROIC) contrasted with its stock price:
While ROIC has been predictable and consistently range bound for the last several years, the stock price has been anything but. It seems hard to believe that the market is efficiently pricing this security when its price can fluctuate wildly in relatively short periods of time while the company itself generates predictable earnings on capital. For example, if the company is worth X amount in early 2000, how does it become worth just one quarter of this amount 3 months later, and then three times this amount six months after that?
More recently, three months ago the market valued Best Buy at $7 billion, but now values it at $16 billion! Investors who recognized the mispricing have seen returns of over 100% in a 3 month period!
We've also seen other examples of this phenomenon: we've looked at graphs illustrating wild fluctuations in the historical P/E ratios of Coke (KO) and Walgreens (WAG) (a moneygardener favourite), for example, which have allowed value investors to buy in at tremendous discounts.
Value investors willing to put psychological bias aside and instead invest at the height of the market's fear can indeed achieve above average returns. If this topic interests you, consider subscribing to the Barel Karsan feed.
Disclosure: Author owns a long position in BBY
Thursday, June 18, 2009
72 dividend hikes...
Dividend hikes can sometimes be signals of good financial health; a vote of confidence in the future by a company's management. Yes, amid the credit crisis, recession, and general 'sky is falling' theme, some firms are raising the amount of money they are paying to shareholders on a regular basis. Here is some of the action that has transpired since Lehman Brothers failed in September of 2008.
Shaw Comm. (SJR.B) + 5% raise, pay out ratio = 45%, yield=4.5% telecom
Canadian Utilities (CU) +6% raise, pay out ratio = 40%, yield=4.0% utility
ATCO (ACO.X) +6% raise, pay out ratio = 20%, yield=2.7% utility
CN Rail (CNR) +10% raise, pay out ratio = 23%, yield=2.1% transport
TransAlta (TA) +7% raise, pay out ratio = 91%, yield=5.6% utility
BP (BP) +6% raise, pay out ratio = 53%, yield=6.9% energy
TransCanada (TRP) +6% raise, pay out ratio = 58%, yield=4.9% utility
Fortis (FTS) +4% raise, pay out ratio = 63%, yield=4.3% utility
ADM (ADM) +8% raise, pay out ratio = 18%, yield=2.1% ag./commodity
Toromont (TIH) +7% raise, pay out ratio = 26%, yield=2.6% industrial
BCE (BCE) +5% raise, pay out ratio = 62%, yield=6.5% telecom
Rogers (RCI.B) +16% raise, pay out ratio = 64%, yield=3.8% telecom
3M (MMM) +2% raise, pay out ratio = 40%, yield=3.5% industrial
Coca Cola (KO) +8% raise, pay out ratio = 61%, yield=3.4% cons. staple
Abbott Labs (ABT) +11% raise, pay out ratio = 45%, yield=3.5% healthcare
Wal-Mart (WMT) +15% raise, pay out ratio = 28%, yield=2.2% retailer
P&G (PG) +10% raise, pay out ratio = 37%, yield=3.5% consumer staple
J&J (JNJ) +7% raise, pay out ratio = 38%, yield=3.6% healthcare
IBM (IBM) +10% raise, pay out ratio = 22%, yield=2.1% technology
Exxon (XOM) +5% raise, pay out ratio = 21% , yield=2.3% energy
Clorox (CLX) +9% raise, pay out ratio = 48%, yield=3.6% consumer staple
Other dividend hikes came from companies such as:
Diageo, Thomson Reuters, Costco Wholesale, Target, SYSCO, ING Canada, Molson Coors, Tim Hortons, Monsanto, Genuine Parts, Metro, Progress Energy, CCL, WPP PLC, SNC Lavalin, Uni-Select, General Dynamics, Jean Coutu, McGraw Hill Ryerson, Home Capital Group, National Grid, Vodafone, Cardinal Health, Marsulex, Telus, Florida Public Utilities, National Fuel Gas, Oil Dri Corp., Flowers Foods, Lowes, PPD, Supervalue, Pepsico, McDonalds, Assurant, Excel Energy, Ace, Airgas, AmerisourceBergen, AAON, Raven Industries, Bunge, Communications Systems, Portland General Electric, Amtrust Financial, FactSet Research, Talisman Energy, Safeway, Occidental, Southern Company, JM Smucker, Hudson City Bancorp.........the list is endless if you read Dividends4Life.
Shaw Comm. (SJR.B) + 5% raise, pay out ratio = 45%, yield=4.5% telecom
Canadian Utilities (CU) +6% raise, pay out ratio = 40%, yield=4.0% utility
ATCO (ACO.X) +6% raise, pay out ratio = 20%, yield=2.7% utility
CN Rail (CNR) +10% raise, pay out ratio = 23%, yield=2.1% transport
TransAlta (TA) +7% raise, pay out ratio = 91%, yield=5.6% utility
BP (BP) +6% raise, pay out ratio = 53%, yield=6.9% energy
TransCanada (TRP) +6% raise, pay out ratio = 58%, yield=4.9% utility
Fortis (FTS) +4% raise, pay out ratio = 63%, yield=4.3% utility
ADM (ADM) +8% raise, pay out ratio = 18%, yield=2.1% ag./commodity
Toromont (TIH) +7% raise, pay out ratio = 26%, yield=2.6% industrial
BCE (BCE) +5% raise, pay out ratio = 62%, yield=6.5% telecom
Rogers (RCI.B) +16% raise, pay out ratio = 64%, yield=3.8% telecom
3M (MMM) +2% raise, pay out ratio = 40%, yield=3.5% industrial
Coca Cola (KO) +8% raise, pay out ratio = 61%, yield=3.4% cons. staple
Abbott Labs (ABT) +11% raise, pay out ratio = 45%, yield=3.5% healthcare
Wal-Mart (WMT) +15% raise, pay out ratio = 28%, yield=2.2% retailer
P&G (PG) +10% raise, pay out ratio = 37%, yield=3.5% consumer staple
J&J (JNJ) +7% raise, pay out ratio = 38%, yield=3.6% healthcare
IBM (IBM) +10% raise, pay out ratio = 22%, yield=2.1% technology
Exxon (XOM) +5% raise, pay out ratio = 21% , yield=2.3% energy
Clorox (CLX) +9% raise, pay out ratio = 48%, yield=3.6% consumer staple
Other dividend hikes came from companies such as:
Diageo, Thomson Reuters, Costco Wholesale, Target, SYSCO, ING Canada, Molson Coors, Tim Hortons, Monsanto, Genuine Parts, Metro, Progress Energy, CCL, WPP PLC, SNC Lavalin, Uni-Select, General Dynamics, Jean Coutu, McGraw Hill Ryerson, Home Capital Group, National Grid, Vodafone, Cardinal Health, Marsulex, Telus, Florida Public Utilities, National Fuel Gas, Oil Dri Corp., Flowers Foods, Lowes, PPD, Supervalue, Pepsico, McDonalds, Assurant, Excel Energy, Ace, Airgas, AmerisourceBergen, AAON, Raven Industries, Bunge, Communications Systems, Portland General Electric, Amtrust Financial, FactSet Research, Talisman Energy, Safeway, Occidental, Southern Company, JM Smucker, Hudson City Bancorp.........the list is endless if you read Dividends4Life.
Tuesday, June 16, 2009
buying 'made in China', and other links
When you refuse to buy products that are made in China, and instead seek 'Made In Canada' or 'Made In USA' labels are you perpetuating lavish lifestyles of excess.? Frugal Bachelor thinks so.
Thicken My Wallet wrote about 5 questions you need to answer when starting a business
Investing website, The Motley Fool calls SYSCO (SYY), McDonalds (MCD), and Wal-Mart WMT) 3 ridiculously cheap, high quality companies. All 3 generate return on equity above 20% and have solid histories of dividend growth. I recently doubled my SYSCO position.
Thicken My Wallet wrote about 5 questions you need to answer when starting a business
Investing website, The Motley Fool calls SYSCO (SYY), McDonalds (MCD), and Wal-Mart WMT) 3 ridiculously cheap, high quality companies. All 3 generate return on equity above 20% and have solid histories of dividend growth. I recently doubled my SYSCO position.
Monday, June 15, 2009
doubled my SYSCO holding
Today I made my first equity purchase in my non-registered portfolio since February. I doubled my position in food service firm SYSCO (SYY) at $22.95/share. For my thoughts on SYSCO click here.
About half of this purchase was made with dividends and distributions which I've received over the past few months.
Like all of my other holdings, SYSCO will be a long term piece of my portfolio. The stock currently yields more than 4%, and trades at a P/E ratio that is well below it's historical average. The company is having a flat 2009 due to the recession, however I expect the company to come out of this downturn with more market share, and to return to earnings growth that will warrant a P/E north of where it is today. The restaurant industry is under a dark cloud right now due to the downturn in consumer discretionary purchases. I believe in due time this area will pick up and SYSCO will benefit.
Thursday, June 11, 2009
Clorox hikes dividend 9%
The maker of Brita® filters and Liquid Plumr® has raised it's dividend by 9%. Consumer products firm Clorox (CLX) announced a dividend raise today from $0.46 to $0.50 per share. I own shares of Clorox and it certainly feels like it has been a while since my last dividend raise within my portfolio. It is welcome news indeed.
Here is a glance at Clorox's recent dividend history:
Fiscal 2005 = $1.10
Fiscal 2006 = $1.14
Fiscal 2007 = $1.20
Fiscal 2008 = $1.60
Fiscal 2009 = $1.84
Fiscal 2010 = $2.00 (EST)
This represents a compound growth rate of the dividend of 12.7%.
Here is a glance at Clorox's recent dividend history:
Fiscal 2005 = $1.10
Fiscal 2006 = $1.14
Fiscal 2007 = $1.20
Fiscal 2008 = $1.60
Fiscal 2009 = $1.84
Fiscal 2010 = $2.00 (EST)
This represents a compound growth rate of the dividend of 12.7%.
Monday, June 8, 2009
creative wealth growth
Thank you to all who submitted questions for The Personal Finance Clinic. We received several questions and we hope to answer most of them over the next few months. Please visit Canadian Capitalist and Triaging My Way to Financial Success to view the balance of the Q&A.
Jessica asked,
I'm a regular reader of themoneygardener and since graduating from university debt-free, I've been trying to find resources for people like me who are not dealing with debt, but just a lack of education in what else to do with the rest of my paycheques. I already know about different investment vehicles and have money invested in a mix of GICs, mutual funds and stocks, but it would be good to get more opinions on what other wealth-building strategies are available to someone who is in their late 20s and has time and money on their side.
Like Frugal Bachelor has already written in one of his recent posts, most personal finance blogs aren't challenging enough for their readers. Think about it: if you're using your free time to enhance your personal wealth, you probably have a handle on your finances already. So maybe it's time to get creative and see what else is available to the budget-and-personal-finance conscious crowd.
Thanks for the interesting question Jessica. It is a great thing to have time and money on your side. Personally I would add debt as a tool for your toolbelt as well, and I wouldn't shy away from using other people's money as leverage.
Even though I do not have a direct answer to your question, I thought I'd publish it anyway just because I found it thought provoking. It also did not hurt that you mentioned your 'regular reader' status. The reason why you'll find that most personal finance blogs discuss the same strategies, is that they are indeed personal finance blogs. The bloggers tend to write about what they know, and in most cases that happens to be investing, saving, and other personal finance topics.
Getting Creative
I am of the opinion that the greatest way for an individual to grow wealth quickly is by starting a business. I'm fairly certain that there are a plethora of blogs that would discuss this area. In the personal finance blog space, I know that Thicken My Wallet as well as Four Pillars have discussed entrepreneurship at length.
The 80 hour work week just isn't all it is cracked up to be. Most wealth building strategies really would centre around investing. Try starting your own business, earning rental income, or building wealth in any other way without at some point making an investment. You can serve other people to earn a living, but true wealth can usually only be built by putting your hard earned capital at risk. Good luck!
Jessica asked,
I'm a regular reader of themoneygardener and since graduating from university debt-free, I've been trying to find resources for people like me who are not dealing with debt, but just a lack of education in what else to do with the rest of my paycheques. I already know about different investment vehicles and have money invested in a mix of GICs, mutual funds and stocks, but it would be good to get more opinions on what other wealth-building strategies are available to someone who is in their late 20s and has time and money on their side.
Like Frugal Bachelor has already written in one of his recent posts, most personal finance blogs aren't challenging enough for their readers. Think about it: if you're using your free time to enhance your personal wealth, you probably have a handle on your finances already. So maybe it's time to get creative and see what else is available to the budget-and-personal-finance conscious crowd.
Thanks for the interesting question Jessica. It is a great thing to have time and money on your side. Personally I would add debt as a tool for your toolbelt as well, and I wouldn't shy away from using other people's money as leverage.
Even though I do not have a direct answer to your question, I thought I'd publish it anyway just because I found it thought provoking. It also did not hurt that you mentioned your 'regular reader' status. The reason why you'll find that most personal finance blogs discuss the same strategies, is that they are indeed personal finance blogs. The bloggers tend to write about what they know, and in most cases that happens to be investing, saving, and other personal finance topics.
Getting Creative
I am of the opinion that the greatest way for an individual to grow wealth quickly is by starting a business. I'm fairly certain that there are a plethora of blogs that would discuss this area. In the personal finance blog space, I know that Thicken My Wallet as well as Four Pillars have discussed entrepreneurship at length.
The 80 hour work week just isn't all it is cracked up to be. Most wealth building strategies really would centre around investing. Try starting your own business, earning rental income, or building wealth in any other way without at some point making an investment. You can serve other people to earn a living, but true wealth can usually only be built by putting your hard earned capital at risk. Good luck!
Thursday, June 4, 2009
net worth history
I believe that net worth is a very important measure of one's financial health. Keeping your net worth statement in mind when making financial decisions will usually lead you to make the correct choice. Most of successful personal finance comes down to trying to grow your net worth. With that being said, I wanted to look at my net worth progression over the past few years.
YEAR ONE May, 2006 to May, 2007
YEAR ONE May, 2006 to May, 2007
- Net worth grew 108%
- Started the year with $0.77 of debt for every dollar of assets and ended the year with $0.60 of debt
- Started the year with a house value that made up 83% of our total assets and ended the year at 77%
- S&P 500 index was up roughly 18% over the year
YEAR TWO May, 2007 to May, 2008
- Net worth grew 40%
- Started the year with $0.60 of debt for every dollar of assets and ended the year with $0.51 of debt
- Started the year with a house value that made up 77% of our total assets and ended the year at 70%
- S&P 500 index was down roughly 6% over the year
YEAR THREE May, 2008 to May, 2009
- Net worth grew 5%
- Started the year with $0.51 of debt for every dollar of assets and ended the year with $0.51 of debt
- Started the year with a house value making up 70% of our total assets and ended the year at 66%
- S&P 500 index was down roughly 38% over the year
YEAR FOUR PREVIEW The markets are due for a good year, and we are due for a large net worth increase as we fuelled the fire with extra funds during YEAR THREE. After all it can't get much worse than YEAR THREE.
What do you think a strong percentage long term annual compounded net worth growth rate would be?
Consider that a good investment rate of return is considered to be 10%+, but with net worth, debt is being paid off at the same time, and one's home makes up a good percentage of assets in most cases.
Monday, June 1, 2009
fixing things in dark times
Thank you to all who submitted questions for The Personal Finance Clinic. We received several questions and we hope to answer most of them over the next few months. Please visit Canadian Capitalist and Triaging My Way to Financial Success to view the balance of the Q&A.
Kris asked...
"Like many people, I have lost a lot of money (at least on paper) in my RSP account.
I don’t have a particularly good mix of mutual funds (took poor advice from a poor advisor), and I had started the process of re balancing into an ETF-based “couch potato” mix (by started, I mean I had thought it through, read up, and picked an asset mix but didn’t actually sell and buy) when the market tanked.
What should I do now? I am still saving but currently holding my savings in an ING savings account (some are for retirement and some are in a general account as I'm hoping to buy a home now that Vancouver's real estate market is somewhat cooled down).
What should I do with my RSP portfolio? Should I just accept my paper losses, sell my mutual funds and execute my plan (I hate to lock in the money I’ve lost but….)
Or, should I just wait it out with my current portfolio, and use any new retirement savings to operationalize my couch potato portfolio? If I wait for my current portfolio to bounce back (at least partway) , how long is reasonable? 1 year? 5 years?
No doubt that many are in your shoes Kris. We have all seen the value of our registered investments drop substantially over the past two years. If you have truly seen the flaws in your current asset mix as well as investment vehicles, I am going to assume that you are paying high management fees (MERs), and/or you are diversified poorly by having too much risk, too little risk, or your sector allocation is out of whack for your time horizon and investor profile. The good news is that it sounds as if you have done some research and you have a plan that will lower your fees and diversify you more appropriately.
Regarding your specific question, I would recommend that you implement your strategy as soon as possible. The way to think about this is that it really does not matter when you sell your mutual funds and buy the new ETFs because you will either be selling low and buying low or selling high and buying high. Theoretically it makes no difference if you are selling and buying like items. For example if you sell a managed Canadian Equity mutual fund and buy a Canadian Equity ETF right now you are selling at point X in the markets and buying at point X in the market. You are no further behind or ahead except for the fact that you believe you are getting into a more appropriate investment vehicle. This is a positive, proactive action.
Things to watch out for:
Kris asked...
"Like many people, I have lost a lot of money (at least on paper) in my RSP account.
I don’t have a particularly good mix of mutual funds (took poor advice from a poor advisor), and I had started the process of re balancing into an ETF-based “couch potato” mix (by started, I mean I had thought it through, read up, and picked an asset mix but didn’t actually sell and buy) when the market tanked.
What should I do now? I am still saving but currently holding my savings in an ING savings account (some are for retirement and some are in a general account as I'm hoping to buy a home now that Vancouver's real estate market is somewhat cooled down).
What should I do with my RSP portfolio? Should I just accept my paper losses, sell my mutual funds and execute my plan (I hate to lock in the money I’ve lost but….)
Or, should I just wait it out with my current portfolio, and use any new retirement savings to operationalize my couch potato portfolio? If I wait for my current portfolio to bounce back (at least partway) , how long is reasonable? 1 year? 5 years?
No doubt that many are in your shoes Kris. We have all seen the value of our registered investments drop substantially over the past two years. If you have truly seen the flaws in your current asset mix as well as investment vehicles, I am going to assume that you are paying high management fees (MERs), and/or you are diversified poorly by having too much risk, too little risk, or your sector allocation is out of whack for your time horizon and investor profile. The good news is that it sounds as if you have done some research and you have a plan that will lower your fees and diversify you more appropriately.
Regarding your specific question, I would recommend that you implement your strategy as soon as possible. The way to think about this is that it really does not matter when you sell your mutual funds and buy the new ETFs because you will either be selling low and buying low or selling high and buying high. Theoretically it makes no difference if you are selling and buying like items. For example if you sell a managed Canadian Equity mutual fund and buy a Canadian Equity ETF right now you are selling at point X in the markets and buying at point X in the market. You are no further behind or ahead except for the fact that you believe you are getting into a more appropriate investment vehicle. This is a positive, proactive action.
Things to watch out for:
- Trading fees (you will likely incur some but minimize them wherever possible)
- If your main intention is too sell a lot of equity investments and with these funds buy a lot of safer (bonds, gics, money market) investments, now may not be the best time to execute this specific trade, as the market has recently crashed, and you may want to put this off for a year or two. These are not like items with like values. That being said nobody knows where the market is going, this is just my opinion.
- Don't lose sight of your investment time horizon and let this be your guide to asset allocation.
If you execute your plan now. You can be confident knowing that your money is now working for you the way you want it to. You have empowered yourself by educating yourself and taking the proper steps to rectify your portfolio. Nobody wants to own investments that are poor if they know better. Good luck with your portfolio and your home purchase.
Friday, May 29, 2009
canadian bank Q2 earnings summary
The big five Canadian Banks have now all reported their second quarter earnings. Many times within these releases the numbers will always focus on the banks results versus analysts' expectations. The majority of these banks beat expectations.
Below is how the the banks fared versus last year's Q2, on an earnings per share, excluding extraordinary items basis. This is a measure of how their continuing operations are holding up amid this recession:
Bank of Montreal (BMO) = Down 25% from last year
Canadian Imperial Bank of Commerce (CIBC) = Down 12% from last year
Toronto Dominion Bank (TD) = Down 7% from last year
Bank of Nova Scotia (BNS) = Down 16% from last year
Royal Bank of Canada (RY) = Down 10% from last year
All dividends were maintained, and none were raised.
Below is how the the banks fared versus last year's Q2, on an earnings per share, excluding extraordinary items basis. This is a measure of how their continuing operations are holding up amid this recession:
Bank of Montreal (BMO) = Down 25% from last year
Canadian Imperial Bank of Commerce (CIBC) = Down 12% from last year
Toronto Dominion Bank (TD) = Down 7% from last year
Bank of Nova Scotia (BNS) = Down 16% from last year
Royal Bank of Canada (RY) = Down 10% from last year
All dividends were maintained, and none were raised.
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