Gavin Graham is president of Graham Investment Strategy Ltd. His focus is on global equities and North American large-cap stocks.
Tim Hortons Inc.
Tim Hortons is the leading fast-food chain in Canada and the fourth largest in North America, with 3,700 restaurants in Canada and the U.S. It claims to serve eight out of every 10 coffees sold in Canada and has been expanding its food choices, especially at lunchtime, to compete with such rivals as McDonald’s Corp. While experiencing slowing same-store sales growth this year – with Q3 same-store sales growth of 1.9 per cent vs. 4.7 per cent in Canada and 2.3 per cent vs. 6.3 per cent in the U.S. – its opening of 85 new stores in Canada and 44 in the U.S. so far this year, price increases on bakery items and new products such as panini sandwiches are helping to drive growth. It sells for 15.9 times next year’s earnings and yields 1.8 per cent.
Dundee International REIT
Dundee, listed last year, owns the former Deutsche Post/DHL portfolio of office, mixed use and industrial properties located in Germany. It has purchased eight office buildings this year while raising an additional $200-million in equity, has more than 82-per-cent occupancy with many buildings at below market rates and is able to exploit the wide gap in Germany between the cost of mortgage financing and the yield on its buildings. With a payout ratio of 98.6 per cent for adjusted funds from operations, and 83.3 per cent adjusted for its cash reserves, it yields 7.8 per cent and sells for 1.2 times book value.
Unilever is the third largest food and consumer products company in the world with such well-known brands as Dove, Hellmann’s, Lipton, Vaseline, Knorr and Persil. It has operations in 100 countries, sales in 190, employs 171,000 people and had sales of $60-billion (U.S.) in 2011. It has concentrated on its leading brands under new chief executive Paul Polman, who took over in 2009, especially in its fast-growing personal care products division (shampoo, hair conditioners and deodorant), where it bought Radox and Alberto Culver for $5-billion in 2010. It gets 55 per cent of its revenues from the faster growing emerging markets, making it one of the multinationals most exposed to this area. It sells for 16.7 times next year’s earnings and yields 3.2 per cent.
Past Picks: Dec. 28, 2011
Total return: -14.72 per cent
Genworth MI Canada Inc.
Total return: +12.42 per cent
Brookfield Asset Management Inc.
Total return: +29.13 per cent
Total Return Average: +8.94 per cent
Stock markets moved higher after the announcement of QE3 by the U.S. Federal Reserve in August and the willingness of the European Central Bank to support Mediterranean countries’ bond prices with unlimited liquidity. As a result, 2012 was the strongest year for major markets since 2009, with the exception of China and Toronto. Concerns over Chinese growth and its effect on commodity prices have held back the TSX, but with China’s new leadership in place and stimulating the economy, further strength in resources and the Canadian market should be anticipated in the first half of 2013. While inflation is not an issue at present, government bond yields do not appear good value currently, and may be vulnerable to any rise in concerns over inflation. The U.S. budget “fiscal cliff” is likely to be resolved with a partial compromise, which may not address the longer term issues, and investors should retain some exposure to precious metals. They act as insurance in the event of an unexpected event, such as conflict in the Middle East or a country leaving the euro zone.
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