Canadian bank stocks are not in danger of imminent collapse but we should look for lower dividend growth in the future.Reuters
Blade Runner 2049, directed by Canadian Denis Villeneuve, will be in theatres in October and I intend to be among the first to see it. It's the original Blade Runner, released in 1982, however that holds the lesson for investors.
In the early 1980s, the dystopian year 2019 depicted in Blade Runner -- complete with flying cars, energy guns and replicants, the genetically manufactured androids indistinguishable from people – seemed entirely plausible. But 2019 is only two years away now and none of this technology exists in feasible forms. We as people always expect the future to arrive sooner than it does.
Which brings us to the oil industry.
Joel Couse, chief energy economist at French oil giant Total SA, raised a stir this week by predicting that the development of electric vehicles would result in global demand for oil to peak and begin to decline in the 2030s. In March, Royal Dutch Shell CEO Ben van Beurden voiced an even more aggressive forecast, estimating that peak oil demand would hit in less than a decade.
A gasoline-free future is utopian, not dystopian, but like Blade Runner's replicants, I think it's still a long way off. China and the United States are the largest markets for electric and hybrid vehicles but they accounted for only 1.0 per cent and 0.7 per cent of total sales in 2015 (last data available from the International Energy Agency). So far, eight countries account for 90 per cent of global electric vehicles sales, leaving gasoline power the only option in most of the world.
There are also infrastructure-related hurdles to replacing fossil fuel consumption. Electric power grids will need substantial upgrading – a study in the U.K. concluded that some neighbourhoods would see power shortages with only six cars charging – and replacing every gas station with powering centres is no small feat.
The proliferation of new electric technology is welcome for a host of reasons and peak demand for fossil fuels is inevitable at some point in the next 50 years. But just because we can picture it, doesn't make it imminent.
--Scott Barlow
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Stocks to ponder
Aecon Group Inc. This industrial stock has been under pressure but is holding above a level that would place it on the negative price breakout list, writes Jennifer Dowty. The stock offers investors a 3 per cent dividend yield, which appears sustainable. Management is committed to returning capital to its shareholders and announced an 8.7 per cent dividend hike last month. There are 11 buy recommendations with the Street forecasting 20 per cent upside potential in the share price over the next year.
Cineplex Inc. This stock is from the top performing sector in the TSX Index so far in 2017, consumer discretionary. While this stock has lagged the strong sector return (rallying 4 per cent compared to the sector return of 10.45 per cent year-to-date), the share price may gain traction over the balance of the year. Earlier this week, the stock appeared on the positive price breakouts list and it would not be surprising to see the stock resurface on this list in the near future, writes Jennifer Dowty. It is a market leader with 44 per cent earnings growth and a 3 per cent yield.
Premium Brands Holdings Corp. This stock is in a long-term uptrend and appeared on the positive breakouts list at the start of the week, writes Jennifer Dowty. The stock offers investors a 2 per cent dividend yield. Management is committed to returning capital to its shareholders and has announced dividend increases of 10 per cent or higher for the past three consecutive years. In the near-term, the share price may drift lower as the valuation appears lofty, at the top end of its historical range. However, a pullback may be a potential investment opportunity for long-term investors. The average 12-month target price is $84.97, implying the stock is fairly valued. Analysts have target prices ranging from a low of $74 to a high of $100.
Dollarama Inc. It's no secret that Dollarama has been a fabulous investment. Since its initial public offering in October, 2009, the shares have posted a scorching annualized total return of about 40 per cent, blowing away the 7.3-per-cent annualized return of the S&P/TSX composite index over the same period. Dollarama's sales and earnings growth are the envy of other retailers, and there's plenty of expansion still to come: With about 1,100 stores in Canada currently, the company recently raised its target to 1,700 stores, up from a previous estimate of 1,400. But as a dividend investor who prefers stocks with relatively high and growing yields and conservative valuations, John Heinzl says he has never considered Dollarama a good fit for his investing style. Even as the company has raised its very modest dividend at an annualized rate of nearly 15 per cent since declaring its first payment in 2012, the shares still yield a token 0.4 per cent.
Reflections of a fund manager who used to own Home Capital
The unfolding Home Capital Group Inc. saga is both tragic and full of irony, writes Michael McCloskey, the founder and president of GreensKeeper Asset Management. The company fully exited its position in Home Capital in the fourth quarter 2016. This is a stock that GreensKeeper has purchased and sold on several occasions over the past five years. At one price, it was viewed as attractive, and at another less so. There were two main issues that factored into the company's decision to exit the stock at that time. First, as the media reminds everyone, the Canadian housing market is not cheap. That doesn't mean that a selloff is inevitable. However, it does mean that the risk for mortgage lenders like Home Capital is heightened. Second, there were a number of company-specific issues that gave GreensKeeper pause. Third-party mortgage broker fraud, the retirement of the founding CEO and slowing mortgage origination. The asset manager concluded that it was better off taking profits and investing elsewhere. Turns out, that was a good move.
Bearish bets against Canada's big banks remain at heightened levels
One revered hedge fund manager gave up on his bearish bet against Canadian banks but overall short positions on the Big Six lenders remain high relative to their long term average. And, with the collapse of Home Capital Group's stock price highlighting a potential pricking of the domestic housing bubble, we can expect bearish positions to remain popular among global speculative investors, writes Scott Barlow. David Einhorn, billionaire hedge fund manager and founder of Greenlight Capital, announced that he had closed short positions on three unnamed Canadian banks in his most recent letter to clients. Mr. Einhorn, however, is only one of many hedge funds managers betting against Canadian lenders and for most of the major banks, short positions as a percentage of the total stock float remain well above their 10-year averages.
Home Capital: Don't try to catch falling knives
Larry Berman writes that he's been asked a dozen times in the past few days about Home Capital Group. His conclusion: Avoid the stock because there are going concern issues. Speculators love to catch falling knives in hopes of catching the big rebound. A falling knife is a market term for trying to pick a bottom on a stock that has fallen off a cliff. You might catch it, but you'll likely get cut up if you do. This is not value investing, this is pure unmitigated speculation. Most investors should not play this game. There is no prudence whatsoever and even most of the professionals will get this wrong. The fact that the stock fell below the lows seen in 2008/2009 – it hit $7.50 in November, 2008 – should tell you this reaction is worse than expectations after the Great Recession. The stock traded as low as $5.99 this week.
The Rundown
David Rosenberg: Why I'm turning bullish on the Canadian dollar
When the Canadian dollar touched 76.92 cents (U.S.) back in mid-February, David Rosenberg recalls saying that it had moved too far, too fast, and since it was largely due to shifting hedge fund short covering, the move would be temporary and to expect a return to a range between 71.43 cents and 74.07 cents before long. Well, courtesy of Donald Trump's well-publicized tariff hikes on Canadian dairy products and softwood lumber, the markets took the loonie down to its weakest level in 14 months. While these "American First" manoeuvres made front-page headlines everywhere, the reality is they will end up trimming Canadian real GDP growth by less than 0.1 per cent. The loonie bears doth protest too much.
Looking for new blue-chip dividend growth stock options? Try these
You tend to see a lot of the same names over and over when you look at lists of dividend growth stocks – Metro Inc., Canadian National Railway, Alimentation Couche-Tard, Enbridge, Telus and more, writes Rob Carrick. Looking for new blood in the dividend growth area? One way to build a list of candidates for further research is to cross reference the one- and five-year dividend growth rates for blue chip stocks. The quarry: Companies with much higher growth rates in the past year than over the previous five years. Here are some names that came up after running this screen on stocks in the S&P/TSX 60 index on Globeinvestor.com.
Gordon Pape: My Balanced Portfolio has gained almost 10% annually
In September, 2011, Gordon Pape created a Balanced Portfolio for income investors with the goal of combining above-average cash flow with reasonable risk. The initial portfolio valuation was $25,027.75, and the target was to achieve a return that at least matched the best available five-year GIC rate plus two percentage points. The best five-year rate available at this time is 2.55 per cent, so we are looking for an annual return on this portfolio in excess of 4.55 per cent. It's done much better with a return of nearly 10 per cent annually.
Others:
Q&A: Nikhil Thadani from Mackie Research highlights his top three stock picks
Ten stocks insiders are selling
The week's most oversold and overbought stocks on the TSX
TSX earnings scorecard: How first-quarter results have fared so far
Number Crunchers
Seven U.S. banks poised to benefit from possible Dodd-Frank changes
Ten stocks trading at or below sector median that also show short-term growth
Nine U.S.-listed stocks with the potential for earnings surprises
Ask Globe Investor
Question: As an investor in Pizza Pizza Royalty Corp. (PZA), I have noticed the privately held operating company, Pizza Pizza Ltd., receives additional securities exchangeable into shares of PZA whenever new restaurants are added to the royalty pool. Pizza Pizza Ltd. now effectively owns 21.1 per cent of PZA, up from 20.4 per cent in 2016 and 19.9 per cent in 2015. If this trend continues, is it of long-term concern for PZA shareholders?
Answer: No. PZA and other restaurant royalty stocks – such as A&W Revenue Royalties Income Fund (AW.UN) and Keg Royalties Income Fund (KEG.UN) – employ a similar structure and use a nearly identical formula when new restaurants are added to their royalty pool.
Essentially, every year, the royalty company must pay the operating company for the future stream of royalties tied to sales of new restaurants added to the royalty pool. (For PZA, the royalty is 6 per cent of Pizza Pizza's annual system sales and 9 per cent of Pizza 73's system sales.)
However, PZA does not pay cash to Pizza Pizza Ltd. for the rights to the new royalty stream. Rather, it gives Pizza Pizza Ltd. additional shares exchangeable into PZA shares. That's why Pizza Pizza Ltd.'s effective ownership interest in PZA has been rising (and will likely continue to rise, barring a sale by Pizza Pizza Ltd. of a portion of its stake in PZA, such as happened in 2015).
Far from being detrimental, however, the formula used to calculate the number of exchangeable shares payable to Pizza Pizza Ltd. is actually beneficial to PZA shareholders.
Essentially, Pizza Pizza Ltd. agrees to pay a royalty, forever, on new restaurants added to the royalty pool. In exchange for receiving these royalties, PZA awards Pizza Pizza Ltd. shares exchangeable into PZA stock, using a formula agreed to at the company's initial public offering. The formula is complex – it takes into account factors including sales of the new restaurants, the royalty rate, taxes and the yield on PZA shares – but the upshot is that PZA effectively purchases the new royalty stream at a 7.5-per-cent discount.
Because of that discount, these annual restaurant "vend-ins" to the royalty pool increase cash flow for each PZA share, even as Pizza Pizza Ltd.'s effective ownership in PZA also increases. If sales of the new restaurants grow in future years – as expected – PZA shareholders would benefit even more as its royalty income increases. Furthermore, Pizza Pizza Ltd. has an incentive to grow royalty pool sales by opening new restaurants and increasing same-store sales of restaurants already in the royalty pool.
--John Heinzl
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What's up in the days ahead
In Saturday's Globe Investor, our market strategist Scott Barlow presents the perfect anecdote to the poorly diversified TSX composite index. He has constructed a well diversified and backtested portfolio of ETFs that Canadians may want to use as a benchmark for their own performance.
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Compiled by Gillian Livingston