Summer vacation

Greetings all. I am currently on vacation, and also in the middle of moving to a new province. There won’t be much in the way of posts for the next month. I was hoping to get Q2 results out, but relocating has taken more time than I thought.

Meanwhile, I have been pleased with the performance of my portfolio. I’ve been neck and neck with the index over the last few months. I was ahead in May and then the index pulled ahead in June.

Recent strong performers include Clarke (TSE: CKI) and Noranda Income Fund (NIF.UN). For Noranda, zinc prices continue to be strong and there is a worldwide decrease in supplies. The next few quarters should be very good if they have good operations.

There is one big laggard in my portfolio, which is Norbord (TSE: NBD). They are severely lagging their peers as well, more diversified companies such as Western Forest Products (TSE: WEF), West Fraser Timber (TSE: WFT) and even Canfor (TSE: CFP). It’s not a huge weighting for me, so I’m holding for now, but I could see myself selling by the end of the year.

Have a great summer!

If you have any questions, feel free to comment or send an email to inbox@dividendblogger.com.

Dividend Increases #2 – June 2014

Opening Comments

The TSX broke its all-time record closing value on Wednesday. It also set a record close on Thursday before falling back. The index doesn’t concern me too much – 8 of my 25 stocks in my portfolio are part of the TSX 60, which makes up most of the index weighting. This means I only have a 32% overlap. Many companies aren’t even part of the wider index, but sometimes they grow large enough that they are added, like Autocanada was this past week.

There are a couple of reasons why I’m not a big fan of Canadian stock indexes. I don’t like all of the stocks in the index for various reasons (usually because they’re too expensive, or don’t pay dividends. Or both).  And, the index is cap weighted. This means the biggest companies have the most influence. It is fairly well proven that smaller companies have greater long-term returns. Why wouldn’t I want exposure to the smaller companies on the TSX?

One solution would be an equal weight ETF that holds all of the stocks in the index in equal amounts. Unfortunately, there are no such products in Canada that I am aware of. So, I continue to pick and choose the companies I see the most value in.

My strategy now that the index is in record territory: I am staying invested, but not adding new cash at this time. I have been happy adding cash fairly indiscriminately for the last 5 years, but now I think it’s time to pause. I’ll let the portfolio run though – I’m not much of a market timer, but I really am looking forward to another bear market with very low valuations. If I don’t have some funds available, I won’t be able to get the one-in-a-decade bargains when they eventually arrive.

The Dividend Increases

Ticker Name Dividend Increase New Yield P/E Payout 1 Year Return
SGY.TO Surge Energy 11.1% 7.5% - 64.7%
LRE.TO Long Run Exploration 4.5% 7.3% 23 165.7% 57.6%
CVL.TO Cervus Equipment 1.2% 3.9% 15 57.5% 9.8%
CAR.UN Cdn Apartment REIT 2.6% 5.0% 15 72.9% 10.1%
NAL.TO Newalta Corporation 13.6% 2.3% 24 55.7% 63.7%
AD.TO Alaris Royalty Corp 4.2% 5.2% 24 124.1% -3.2%

About The Increases

The first two companies, Surge Energy and Long Run Exploration, are smaller oil producers with high dividend payouts. These companies have been doing very well with the recent run-up in oil prices. I’m not currently invested in any small oil companies, although I have in the past. They aren’t very easy to value, and they are often unprofitable. But they don’t pay taxes and have oil reserves which become more valuable when the price of oil increases. Surge has four dividend increases in the last year since starting a dividend – they seem determined to return cash to shareholders. Long Run has an even smaller dividend history – six months – and this is the first dividend increase.

Cervus Equipment is a retailer of industrial, construction and agricultural equipment. They have a very interesting dividend history – 10 consecutive quarterly dividend increases. That is 10 increases in the last 2.5 years. The increases are small, totaling around 14% in that period of time. I like this company – good value, good dividend and steady dividend increases – and it’s on sale, down about 15% from its 52 week high.

Canadian Apartment REIT is a solid real estate company that is definitely a buy. It trades at a P/FFO of 15 with an 11% increase in FFO year over year – excellent growth for a REIT. They aren’t a dividend achiever, but this is the 11th dividend increase since the company went public in 1997.

Newalta Corporation is an oilfield services company. It’s very expensive, but it’s on my radar because of its 4th consecutive annual dividend increase. They may be a True Dividend Achiever as of next year. I used $0.90 in adjusted earnings to calculate the P/E. NAL.TO would be a buy if it was still trading at its year ago price, but not now.

Finally, Alaris Royalty Corporation announced its first dividend increase in over a year. I used to own shares in them (I just about doubled my money in about a year), but sold when they started getting expensive. I like the company’s model, and would definitely buy back in again if the price was right. The yield would have to be well above 6% though – dividend growth will be slow in Alaris from now on.

Conclusions

Have a good investing week. I’m only going to have a few more weeks before I take a month-long summer pause, as I’m conducting an inter-provincial move this summer which will disrupt blogging.

If you have any questions, feel free to comment or send an email to inbox@dividendblogger.com.

Will the TSX hit an all time high?

The TSX

The TSX has finally closed above 15,000. It is within 0.5% of the all time highest close in 2008 high. The TSX is also within 1% of its intra-day high (its true all-time high).

What’s different between now and June 2008? The energy index, which is up 5% this week, and comprises nearly 30% of the index (and mainly responsible for the recent push), is still down quite a bit from June 2008. In fact, it is at least 25% lower. If you recall, oil prices surged to $150 a barrel in 2008. While oil prices are up recently, they are still well below that 2008 high. I believe the oil index has a long way to go. The iShares ETF “XEG” is a good way to quickly get exposure, although you can also just buy companies like Suncor (TSE: SU), which has quite a run but remains far below it’s all time high.

The materials index has suffered even more since 2008 – it is nearly 40% lower than 2008 (and even lower than 2011 highs).

So where have the gains come from? Nearly every other sub index is higher. The banks, despite trading below their historical P/E ratios, are much higher due to their steady performance.

What does this tell me? It tells me the index could easily go a lot higher. If the banks were at 2008 P/Es, and the materials and energy indexes returned to 2008 levels, the TSX would be close to 17,500. I believe Canadian investors can be prepared for a long sequence of all time TSX highs, but it does not mean it is irrational behavior.

What else does this tell me? The energy and materials sector are the ones with the most potential. I am looking at various ETFs to add a materials component to my TFSA. XMA is one possibility, although I don’t like its 15% weighing to Potash. ZMT is another possibility, which is less weighting to any one name.

Conclusion

The answer to the title question, in my opinion, is yes. The heavily weighted indexes are not overvalued on a fundamental basis.

Will it happen soon? I don’t know, although I wouldn’t be surprised if it was soon. I think we will soon be hearing in the news on a regular basis that the TSX has hit a new high, similar to what has been happening in the US market (both the Dow and S&P 500) for the last year.

Remember, indexes are nominal. This means they are not adjusted for inflation. Eventually, the TSX will start hitting new records on a daily basis. The Canadian and world economies have grown, as has inflation, so it will only be a matter of time before index values catch up. It has been a great 5-6 years of investing below market highs, but I am confident that will eventually come to an end (until the next bear market!)

If you have any questions, feel free to comment or send an email to inbox@dividendblogger.com.