Buying a Dividend Machine

Photograph: Cash-Flow Machine.

It's easy to say, but often tough to do: buy something popular, before it's popular. As Yogi Berra was once reputed to have said, "It's easy to make money in stocks; just figure out which ones aren't going to go up, and don't buy them"

However, research has repeatedly shown that buying stocks that return money to shareholders, through dividends and/or share buybacks, consistently outperform the market, usually by a wide margin (2% or more).

The best buys however, are usually those whose cash returns to shareholders are just beginning to turn upwards, and those that operate in a protected or oligopolistic environment.

Cable and cell companies fit the bill in terms of limited competitors, and two stocks whose fortunes appear to be ascendancy are Rogers Communications, and Shaw Communications.

Both trade both in Canada on the TSX (RCI.B and SJR.B) and also on the US exchanges (RCI and SJR) respectively.

After a several decades of infrastructure build-out and crushing debt, Rogers is emerging as a cash-flow machine. According to a survey of analysts, as reported here, Rogers is predicted to increase dividends from $1.00 annually to $1.60 later this year, to $2.40 is 2009 and $3.20 in 2010. Morningstar provides some further information, here (note, however, that the dividend information is out of date, as it has been recently raised).

What is also interesting here, is that if the consensus dividend projections are correct, it suggests that the stock may well also be revalued significantly higher by 2010. Compared to its recent price at around $41 (Canadian) with a 2.4% dividend yield, very few quality stocks in Canada yield much over 4.5%. Assuming that the $3.20 in dividends by 2010 is correct, this suggests that the stock may well be valued by the market in the low $70 range at that time, with the distinct possibility of something higher.

Similarly , according to a story here, Shaw Communications, a cable and telephone provider expects to be able to continue churning out the dividend increases. Morningstar provides some further information, here (note, however, that the dividend information is out of date, as it has been recently raised). Shaw's recent price of $23 (Canadian) is producing a 3.2% yield, and it also appears that there may be room for significant upward appreciation of the stock price if the dividends keep getting raised.

In another story, Shaw was picked by analyst Peter Gibson at Desjardins Securities in his outperforming focus portfolio, as one of eight Canadian stocks with the potential to outperform the market. He also picked Rogers in that same portfolio.

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I expect both of these stocks to outperform the broader market over the next five years, and the current dividends (and expectation of future increases) make that prospect just the more tantalizing.


JW

The Confused Capitalist

EFT Benchmark: Broad Canadian Market "XIU" (on the TSX) - $80.40 (Canadian)

Canadian Real Estate Still Charging Ahead

The latest statistics show that Canadian residential real estate prices are still charging ahead.

Since last December, the average home across the country has increased by 11.8%, (a 23% rate if annualized) which is phenomenal since our prime rate too has been increasing over that period. Sales volumes too are up, by 3.6% on a year-over-year basis.

The average house price across the country is now $304,328 (about $272,000 USD), which compares to about $231,000 (USD) for America.

Price increases are being led in oil-rich Alberta, which is facing rises of 40% annually. Although prices have seen a dramatic increase, most market commentators say that the Canadian market, overall, isn't as vulnerable to a downturn as the US market, for two reasons:

1. If Alberta is stripped out of the price picture, the average price increase is much more sensible, and
2. Interest rate increases have been subdued here, and our prime rate about 2% below the US prime rate.

JW

The Confused Capitalist

Real estate values still to be knocked down ...

There's an interesting report on the value of housing in America, updated this month. The Global Insights/National City report suggested, based on 21 years of data, that of 317 metropolitan areas around the US, covering 84% of the housing stock, only 88 markets are currently undervalued (by any amount).

Against that, there are some 71 metro markets - covering 39% of the housing stock - that are "extremely over-valued", meaning that the valuations are at least 34% above what their model projects as correct values. The report further notes that as recently as the first quarter of 2004, only three metro markets were "extremely" overvalued.

And for those that think the housing market is due for a rebound (and prices aren't yet statistically showing up as falling much), the report states that the median correction in overvalued markets in the past 21 years is 17% and that it lasts 14 quarters. That's three and a half years folks. To those that like the seemingly cheap valuation metrics of home-builders and development companies, may I suggest .... patience.

In Canada, however, things are different as the good times appear to roll on for as far as the eye can see. Although there's no apparent signs of a real estate bubble here, perhaps some leading edge indicators suggest that a bubble may be in the early stages of forming.

ReMax just reported that sales of high-end luxury houses are booming across the country, with sales volumes up year over year by 31% in Toronto, by 90% in Vancouver, and by 124% in oil-rich Calgary.

Another five or ten years of this, and we might end up in the same boat as the US market is!

JW

The Confused Capitalist

Canada: Hiding out the market downturn in the land of rocks and trees

Canada's stock market has often been referred to as market of rocks and trees, a reference to it's reliance on commodities like minerals, lumber and oil to power its economic growth and stock markets.

I have written recently about the bell ringing in the US, my opinion that the market is near the top for the stock market, based on a number of signs I see, not the least of which is unrealistic expectations of capital gains (note, things have only gotten more speculative since this was written), rising interest rates, booming commodity prices (a harbinger of inflation, something particularly bad for the US market), risky assets becoming more popular (note, things have only gotten more speculative since this was written), while quality assets languish (i.e. big cap's continue to be available for bargain prices). All of this common sense information makes me also wonder if another 1972-1974 drop might be in the offing, and if so, can one "hide out" successfully in the Canadian hard asset climate, as Sir John Templeton is reported to have done in the secular bear market lasting from 1968 to 1981.

Culling through the TSE (Toronto Stock Exchange - Canada's largest stock exchange, now renamed as the TSX) statistics, if you were focused on avoiding the 1972-1974 bear market, the escape to Canada wouldn't have provided much comfort. The Dow fell by about 40-45% over that time, and the TSE also fell, by a somewhat similar amount. In 1972, the TSE index closed the year at 1226 (its monthly high close for the year), and by December 1974, closed at 835, a decline of 32%. So over the short term, the two markets were fairly similar.

However, over a slightly longer period, it was definitely favorable to be in the Canadian market, as by mid-1979 it had rallied to double in value over it's 1974 close, while the Dow took until 1982 to close above the 1000 level at year end; this was a level it (the Dow) first pierced in 1964 and closed at year end above that in 1972. Perhaps because inflation was such a factor, companies involved in hard assets (mining, lumber, oil) were the prime beneficiaries of hard asset inflation, and thus the Canadian market rallied through the mid-to-late 1970s. This is a scenario that I think is could again be replicated when the US market softens over the next while and struggles over the period thereafter.

I had always thought that the Canadian market had fared better than the US market during the brutal 1970s bear market. It turned out I was both right and wrong.


JW

The Confused Capitalist

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PS: Changes made, May 3 06, 3:20PM, to correct grammer and erroneous reference to 1972 TSE "low close", when it should have stated "high close".

Canada: What Housing Bubble?

Well, apparently unlike the US housing market, even after a strong five years of house price gains, housing in Canada remains undervalued.

According to recent research by Merrill Lynch economist David Wolf, the Canadian housing market is, on average, undervalued by 10-20%. Mr. Wolf ran his model based on average incomes and the cost of debt, and in only one (Victoria) of the 15 major markets measured, was the housing over-priced - and even then it was just a modest 4%.

To check his model accuracy, he ran current prices and incomes in the major US cities (yes, most were over-priced, according to his model), and also ran it against the frothy 1990 Canadian markets (again, his model suggested they were then, in fact, over-priced).

One of the more surprising findings was that even in oil-rich Alberta - after years of very strong gains - the major cities of Calgary and Edmonton were amongst the most-undervalued cities in Canada.

According to Mr. Wolf, Canadian prices can rise by an average of over 4% annually for the next four years before they'll achieve full value.

In the meantime, those worrying about a Canadian housing bubble can relax ... relax ... relax ... relax ...


JW

The Confused Capitalist

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A Business that Uncle Warren would just love!

Found: an IPO that "Uncle Warren" would just love (at the right price of course!)

Canada's most-populous province, Ontario has announced that they will be selling off their interest in the electronic provincial land titles registry, Teranet. Teranet, partially owned by Teramira Holdings Inc., is reportedly ready to push out its prospectus this week, which should be available on Sedar (Canadian equivalent to Edgar), very soon. It is reportedly to be structured in a Canadian income trust format, which eliminates or minimizes corporate taxes. Income trusts have become a favorite of Canadians and Canadian companies over the past few years, with many former corporate entities converting to an income trust.

Teranet is the kind of business that Warren Buffett would just love, since they hold a monopoly on the registration of land title transactions that go on in the province. Just the kind of toll booth that Warren loves.

Teranet charges fees ranging from $18 for an electronic search, to $70 to register a mortgage document. It currently has 750 employees. In 2003, the last year that its operational results were made public, it sported an operating profit for $118 million on revenues of $190 million. Last December, Standard and Poors raised its credit rating to double-A, and noted that $100 million had been taken out of the company during the past year. If Ontario continues growing at the rate demonstrated over the latest available five census years (1996-2001), at about 1.2% annually, combined with revenue increases at or above the rate of inflation, this is a very nice-looking business indeed.

RBC Dominion Securities is leading the offering, and initial reports state that shares are expected to be priced at $10 (CDN) per share level, with initial annual cash distributions projected in the $0.70 to $0.80 range, thus yielding 7-8%. If this is actually the case, I would expect that yields will show a quick decline to the 5% to 6.5% range, as the secondary market quickly reprices the shares to reflect the relative safety and security of this offering. (For comparison purposes, the Yellow Pages Income Trust - probably a lower quality business - sports a 6.4% yield currently).

Over the long haul, given that all land titles have to be registered here, the business looks like a great medium to long-term situation, that should offer the opportunity for above-average returns.

Monopolies: Businesses that Uncle Warren just loves. Maybe you should too!


JW

The Confused Capitalist

Canada: Let the Good Times Roll!

Due to the continued strength of the world economy and the need for basic commodities such as oil and metals, Canada's economy moves from strength to strength.

The latest report shows Canadian unemployment down to a generational low of 6.4%, a rate not seen since the mid-1970s. Some places, like oil-rich Alberta whose unemployment rate is only 3.1%, is experiencing a shortage of workers of all sorts, but particularly those whose skills are needed in the oil patch. The average hourly wage in Alberta is now some $21.39 per hour, and expectations are that this will continue to rise.

This economic boom is expected to be continued to be fuelled by proposed investments of up to $25 billion to turn areas near Edmonton into a refinery hub to rival areas along the Gulf Coast of Texas (sans hurricanes of course). Other areas of the province are booming along with the massive incoming investments, to such an extent that even basic service jobs, like those in fast-food restaurants and grocery stores, are going unfilled.

This too is drawing workers from the long-suffering Atlantic provinces, some 3,000 miles distant into the Alberta economy. While young people have for some time left the region in search of employment, now the chance to earn $5,000 weekly is drawing fathers away from their families for extended periods, as they work in oil fields camps for several months, and return quarterly or semi-annually to get re-acquainted with their wives and children.

In other areas where these resources don't play such a large part in the local economies, such as people-rich Ontario, Quebec and the Atlantic provinces, the angst is palpable, as the soaring Canadian dollar has made it more difficult for manufacturing-dense Ontario and Quebec to import into the US market. There has been much hand-wringing over the fate of the manufacturing region of the country and whether Canada will be subject to the so-called "Dutch Disease".

In any case, while there's some local disruption, there's also no doubt that the boom as a whole is a net economic benefit to Canada, and more particularly, to Alberta.

Aside from the obvious stock market plays into the oil and gas sector, and the mining sector, different Alberta-based public companies should enjoy extended periods of super-sized profitability. These would include those involved in the real estate sector. Three such companies include ALberta-based land developers Melcor Developments Ltd., which trades on the Canadian TSX Exchange under the symbol "MRD", and Genesis Land Development Corp. which trades under the symbol "GDC", and the Boardwalk Rental Communities REIT - the largest owner of residential rental suites in Alberta. It too trades on the TSX index, under the symbol "BEI.UN".

Canada - not just a place that cold fronts come from!


JW

The Confused Capitalist