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I recently finished the book Millennial Money by Patrick O'Shaughnessy who you might know from his Invest Like the Best podcast. Both Patrick and his father James are prominent proponents of factor investing (a.k.a. evidenced based investing), researching and writing extensively on the subject. One particular factor that is prevalent in the Millennial Money book is shareholder yield, a term I decided to explore further.

Although I previously thought that shareholder yield was the sum of dividend yield and buyback yield, I discovered through the S&P TSX Composite Shareholder Yield Index a debt paydown yield is also incorporated. Using the methodology provided by S&P, I tried to recalculate the three components of shareholder yield for the 50 companies that are equally weighted in the index. Based on my results (especially the negative values for the four companies at the bottom of the list), I likely made some mistakes in trying to replicate the calculation methodology set out by S&P. However, I still think the below table identifies some Canadian-listed companies whose management teams are capable capital allocators based on their ability to enhance shareholder value by paying dividends, buying back their shares and paying down debt.




Some of my preliminary observations from the above table are:

- Most of the dividend yields presented above are lower than the current dividend yields (i.e. H&R REIT, Corus Entertainment, Shaw Communications, etc.). This is due to my attempt to stick to the S&P methodology of dividing the total dividends paid over the last twelve months by the market capitalization of the company twelve months ago.
- For the 24 companies with a negative buyback yield, it means they issued more shares than they bought back over the past twelve months. I found it fascinating that almost half of the top shareholder yielders in Canada were net issuers of shares.
- Buyback yield is pretty controversial as management teams have a history of buying their shares back at high prices and subsequently putting an end to share repurchase programs when shares are trading cheaply. For buyback yield to useful on its own, you'd likely have to pair it with a valuation metric.
- Although I find it admirable that Valeant has successfully paid down so much of their debt, they still have about USD 30M of debt and remain a very highly leveraged company (debt/EBITDA ~ 7X).
- Initially, I was impressed with companies like Thomson Reuters that have positive percentages in each of the three factors contributing to shareholder yield. Although, the more I reflect, I wonder if it doesn't make sense for their management teams to focus on maximizing the factor with the highest return (i.e. Spin Master whose sole focus is debt reduction).
-  For shareholder yield to be a useful metric, you'd have to trend it over time. I noticed Suncor retired a nominal amount of shares over the past twelve months. However, they did a huge equity issue in the preceding twelve months that negates any positive buyback yield for a longer-term holder.

Does a high shareholder yield make you more or less likely to invest in a company?
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The list of Canadian companies that pay growing monthly dividends was one of my most read posts in 2017 and 2016. Using the Canadian Dividend All-Star list from December 31, 2017, I determined the list of monthly dividend growers for 2018.   To be included, companies had to pay a monthly dividend, increase their distribution at least once in the last 12 months, and have a minimum 5-year history of annually increasing their payouts.  The initial screen this year yielded 21 companies before I removed three organizations that had not raised their payout in the last 12-months (Exchange Income Corporation, Atrium Mortgage Investment Corporation and Pizza Pizza Royalty Corp). I also removed Boyd Group Income Fund due to their unimpressive 0.5% dividend yield. Although the 17 monthly dividend growers for 2018 fell from 20 last year, it still remains higher than the 12 companies in 2016.

The resulting 17 companies included six real estate investment trusts (REITs). As the payout ratios and valuations of REITs are usually calculated based on funds from operations (FFO) or adjusted funds from operations (AFFO), I decided to separate the resulting list in two so as not to confuse any casual readers. For your browsing pleasure, the resulting lists are included below.

 
Here are some quick comparisons between the monthly dividend payers and the complete list of Canadian Dividend All-Stars:

- 21 of the 101 Canadian Dividend All-Stars at December 31, 2017 pay dividends monthly.
- Although the average yield of all Canadian Dividend All-Stars of 3.13% is considerably less than the seventeen monthly payers listed above (5.25%), the 1-year average dividend growth rate of 9.07% is significantly greater than that of the monthly payers (5.12%). 
- The average 3, 5, and 10-year dividend growth rates of the Canadian Dividend All-Stars of 10.08%, 11.90% and 8.55% are much greater than the comparable growth rates of the monthly payers 6.08%, 6.26%, and 3.15%. 

As with any other screen, the above list is simply a starting point for further research.  Clearly, a deeper dive is required given the average EPS payout ratio of 292% and the high average trailing P/E of 47.3X valuation (partly due to nonsensical values for TransAlta Renewables). As indicated on my Investment Holdings tab, I currently own four monthly paying Canadian Dividend All-Stars (Granite REIT, Canadian Apartment Properties REIT, Enbridge Income Fund Holdings and Enercare Inc.). Of the remaining thirteen companies, I have owned Inter Pipeline in the past, and have included Altagas, First National and Cineplex on past watch lists. 

Do you hold or are you interested in purchasing any of the 20 monthly payers?
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Before I even had a chance yesterday to post my Q1 2018 watch list, I conducted my first transaction of 2018, adding to my Brookfield Infrastructure Partners position in my TFSA. Although I don't have any immediate plans to buy or sell shares, I still wanted to share my watch list. Since my investment holdings consists of my unregistered account, my TFSA, and RRSP, that will be the format in which I present my considerations.

Unregistered Account

This quarter, the theme of my watch list seems to be “utilities”. At current prices, I’m open to adding to my two utility holdings of Canadian Utilties (TSX: CU) and Emera (TSX: EMA). Both of these companies are reasonably priced, have attractive current dividend yields, and have a history of annually dividend increases (46 and 11 years respectively). For similar reasons, when I start to look at companies outside of my holdings, I gravitate towards Fortis (TSE: FTS) and Algonquin Power (TSX: AQN).  I’d consider initiating positions in these two companies since I feel both provide something slightly different than my current holdings. In the case of Fortis, it’s the extensive exposure to 11 states in the US. Exposure to the utility markets in New York, Illinois and Arizona are particularly attractive to me as I see these three states as having largely inelastic and growing demand for power. For Algonquin, it’s the company’s clean energy assets that I’d like to add to my portfolio. Additionally, the company offers investors the option to receive dividends in either US dollars or Canadian dollars, which I also find attractive.

TFSA

I wrote the below paragraph before adding to my position in Brookfield Infrastructure Partners (TSX: BIP.UN) on January 4, 2018. 

My utilities theme extends to my plan to increase my holding of Brookfield Infrastructure Partners. Despite the nearly annual dilutive share offerings in order to finance their growing backlog, I continue to have faith in Brookfield’s excellent management team to effectively manage their utility, transport, energy, and communication infrastructure assets. The company’s recently announced $1.3B sale of an aging Chilean utility investment to a Chinese buyer might mean less or no dilution through share offerings in 2018. Exposure to a worldwide set of infrastructure assets that generate steady amounts of rising income continues to be desirable for me.

RRSP

Although my plan is to let dividends accumulate and add them to my annual RRSP contribution in Q2 2018 to purchase more shares of Digital Realty Trust (NYSE: DLR), there’s one position I might add to in the next three months. With A&W Income Fund (TSE: AW.UN) announcing the addition of 35 net new restaurants to their royalty pool for 2018, it could be an opportune time to add to this position before increased royalties from the new restaurants flow through to A&W’s financial results.


Which companies appear at the top of your watch list for Q1 2018?
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When setting my simplified investment goal for 2017, I knew it would be a stretch to attain. Adding $2,600 of incremental forward dividend income in a frothy bull market, while simultaneously achieving a dollar-weighted average organic dividend growth rate of at least 5% proved to be extremely challenging. It took me 355 days, but I’m happy to report that my latest purchase of Digital Realty Trust pushed me over my benchmark of forward dividend income and my dollar-weighted average organic dividend growth rate ended up at 6.95%. 

Admittedly, there’s a great deal of relief and pride in achieving such a lofty goal. Although I don’t blog very often anymore, I know that having posted my goal helped keep me accountable throughout the year. For that reason, I’m going to bite the bullet and float my 2018 goal:

Increase forward dividend income by $3000 while achieving a dollar-weighted average organic dividend growth rate of at least 5%.

By setting my forward dividend income goal even higher, I’m hoping to motivate myself to keep my foot on the gas and my eye on the prize. As tempting as it is to stray from my strategy of investing in dividend growth stocks, the reality is that my passive income has kept growing at a rapid clip due to my persistence. 

Part of my reason for posting less frequently has been in an effort to avoid entries that add no value to readers. In that vein, I thought sharing my top three investment lessons and mistakes from 2017 might make this entry more worthwhile.

Lesson 1 - Stick with the Plan

In a year where FAANG, Bitcoin and marijuana stocks soared, it was very tempting to jump on those trends. Instead, I stuck with my plan to focus on dividend growth stocks that help built my passive income. Although my strategy is not at all sexy, my results are strong and allow me to sleep well at night.

Lesson 2 - Think Lots, Trade Little

With only 20 trades during 2017 (18 buys, 2 sells), I set a personal low for transactions. Beyond the excellent excuse for not trading of having an infant daughter at home during the last 5 months, my other tactic to avoid churn is to wait at least a week after I think about conducting a transaction. Although I'll never buy at the bottom or maximally profit from a one-day dip, my transaction costs are minimal (less than 10 basis points during 2017).

Lesson 3 - Read, Listen and Absorb

As comfortable as I am with dividend growth investing, I find myself attracted to books, articles and blogs that explore other styles (deep value, contrarian, short selling, evidence based investing, GARP, etc.). I'm also a recent convert to podcasts such as Invest Like the Best, Capital Allocators, Animal Spirits and other more niche offerings. I'm thoroughly convinced that by absorbing these materials,  I can learn from the successes and failures of others. 

Mistake 1 - Letting Performance Metrics Drive Behaviour

My focus on increasing forward dividend income while keeping my dollar-weighted organic dividend growth rate over 5% drove many of my investing decisions in 2017. For most of December, I felt compelled to make one last buy in order to achieve my forward dividend income goal. Similarly, I have passed over a couple of interesting situations such as Home Capital and Cineplex, knowing that they would negatively impact my dividend growth goal. 

Mistake 2 - Adding Positions I Don't Have Time to Properly Monitor

I moved from 33 positions at the end of 2016 to 38 current positions by adding six during 2017 and exiting one (Corus Entertainment). To justify the high number of positions to myself, I consider all seven Canadian banks to be similar holdings, both Enbridge companies are commonly controlled, Aecon should disappear from my portfolio  early in 2018 assuming the Federal Government approves their purchase, and I'm two years into my five year plan of giving away my RioCan shares to charity. Having said all that, there's definitely opportunities to narrow the number of companies I own to make monitoring easier. I have to be more content and comfortable with what I own, and not look elsewhere when considering investments.

Mistake 3 - Committing Numerous Behavioural Investing Errors

This could easily be a blog entry on its own, but just in the past month, I've irrationally anchored on low stock prices that I did not take advantage of, fallen for the sunk cost fallacy by feeling the need to get the most out of my $30 US dollar friendly fee from my brokerage, avoided taking a capital loss on Alaris which I could definitely use in future years, and wasted loads of time trying to justify investments (particularly in Amazon and marijuana stocks) instead of sticking with my strategy. Every time I read anything about behavourial investing, I realize how often I make simple behavioural investing mistakes at every turn. 


Although I plan to share my Q2 2018 dividend growth watch list before year end, on the chance that I don't get around to it, I wanted to wish everyone the happiest of holidays and a prosperous 2018! Thank you for stopping by, reading my thoughts, commenting and providing feedback. 




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If you follow Enbridge Inc (TSE: ENB, NYSE: ENB), you might have noticed the downward reaction in the company's share price when management did not confirm their dividend growth guidance during their Q3 2017 earnings call on November 2nd.  Saying that they were in the process of completing their strategic review, management indicated that they would be in a better position to answer during their investor day scheduled for December 12th. As background, Enbridge is one of the rare Canadian companies that provides detailed dividend growth guidance.  Until November 30th, their investor relations website indicated that the company expected to grow their dividend by 10-12% from 2018 through 2024. 

After the November 2nd earnings call, shares of Enbridge continued to trend downwards losing 7% of their value. Clearly, investors were concerned enough about management not confirming their initial dividend growth projections to punish the share price.  On November 30th, two weeks ahead of the company’s December 12th investor day, management said the dividend would increase by 10% next year, and then by the same amount through 2020. The decline in dividend growth (10% vs 10-12%) along with the shorter period (2020 vs 2024) is in response to concerns relating to Enbridge’s ability to fund $22 billion in major growth projects.

While considering Enbridge, I wondered how many Canadian companies provide dividend growth guidance. Since I couldn't find a comprehensive list online for the Canadian companies that provide such guidance, I started with my only portfolio and worked outward adding a couple other companies that I know provide guidance (many of which are on my watch list). Please consider the table below a starting point for further research and let me know of any other Canadian companies that provide dividend growth guidance. I'll gladly update the table with your input.

TransCanada Corp (TRP)
Dividend growth of 8-10% per year through 2020
Enbridge Income Fund (ENF)
Dividend growth of 10% per year through 2020
Emera Inc (EMA)
Dividend growth of 8% per year through 2020
Telus Corp (T)
Dividend growth of 7-10% per year through 2019
Capital Power Corp (CPX)
Dividend growth of 7% per year through 2020
Fortis Inc (FTS)
Dividend growth of 6% per year through 2022
Algonquin Power (AQN)
Dividend growth of 10% per year through 2021
Brookfield Infrastructure Partners (BIP.UN)
Annual distribution increases of 5-9%
Brookfield Renewable Partners (BEP.UN)
Annual distribution increases of 5-9%
Brookfield Property Partners (BPY.UN)
Annual distribution growth of 5-8%


Does dividend growth guidance make you any more likely to invest in a dividend growth company? 

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After a relatively quiet third quarter on the investment front, with only two transactions, I expect to be a bit busier during Q4.  My daughter was born on July 4th, and now that she is sleeping for longer stretches at a time, I feel more rested and ready to make capital allocation decisions. Since my investment holdings consists of my unregistered account, my TFSA, and RRSP, that will be the format in which I present my considerations.

Unregistered Account
After initiating a full position in the Canadian Imperial Bank of Commerce (TSE: CM) and an almost full position in Canadian Utilities Limited (TSE: CU) in September, I expect to complete two more purchases during Q4 in my unregistered account. I shifted my focus from Power Financial (TSE: PWF) to their parent company Power Corporation (TSE: POW) as the latter has higher dividend growth (7% vs 5%) at a slightly lower valuation. I am also interested in two monthly dividend paying companies with a history of growth, who are both out of favor with investors. Cineplex Inc (TSE: CGX) has long interested me given my love of movies and their near monopoly of movie theaters in Canada. A slow summer contributed to weak Q2 results. Although their share price has bounced off a 52-week low (up about 15%), the idea of collecting a 4.3% yield on one of my favorite Canadian companies is tempting. On the flip side, their 3.7% dividend growth is not terribly inspiring, plus I fear for their long-term relevance with technology enabling studios to by-pass the traditional movie theater distribution channel.  I am also interested in Altagas Ltd (TSE: ALA) given their share price weakness resulting from the massive WGL acquisition that was not taken positively by investors. With management forecasting near-double digit dividend increases out to 2021, backed up by growing EBITDA, this 7% yielder is near the top of my watchlist

TFSA
As the cash position in my TFSA continues to grow, my plan is to increase my position in Brookfield Infrastructure Partners L.P. (TSE: BIP.UN). Brookfield management's record of dividend growth is outstanding, as is there record of accreditive acquisitions and organic growth. The fact they did a USD 1B equity raise in Q3 without materially impacting their share price is further evidence of the trust that investors place in Brookfield's excellent management team.

RRSP

With a growing cash balance in my RRSP and since the Canadian dollar has risen a bit vs the US dollar, I will likely add enough shares to complete my position in Tanger Outlets (NYSE: SKT).  I continue to find the long-term risk/reward equation favorable on Tanger, selling well below its historical Price/FFO multiple. While I can understand the counter argument that online retail sales will eat into Tanger's foot traffic, sales, and margins,  I remain a fan of their outlet centers that consumers will continue to visit in order to secure bargains not available online. The only other company I'm considering adding in either my RRSP or TFSA is Choice Properties REIT (TSE: CHP.UN). Choice would allow me to gain some exposure to the grocery space in Canada since Loblaws are their top tenant, while offering an impressive yield of ~5.6% and a history of distribution growth, all at a reasonable valuation.


Which companies appear at the top of your watch list for Q417?
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Since the second quarter of 2017 was pretty hectic for me on the investment front with nine transactions, my Q3 watch list is more limited in scope.  With shares of 35 companies in my portfolio, an all time high, it would take a high quality company at a great value in order to add a new name to my list of investment holdings. Since my portfolio consists of my unregistered account, my TFSA, and RRSP, that will be the format in which I present my considerations.

Unregistered Account
After initiating a position in Aecon Group (TSE: ARE) in May, it was with mixed feelings that I saw the stock climb over 8% in the last month. The rise is share price put a temporary delay on my plans to slowly add to my position.  My attention shifted more toward Enbridge (TSE: ENB) and Enbridge Income Fund (TSE: ENF) as their prices have fallen along with oil prices. My main issue is that I currently own full positions in each of these related companies, and have to consider if going overweight makes sense from a diversification perspective. In terms of other companies that are on my radar, First National (TSE: FN), CIBC (TSE: CM), and Suncor (TSE: SU) are all interesting. First National and CIBC are both attractively valued, but don't help my portfolio diversification aspirations. Although Suncor would help from a diversification perspective, it's difficult for me to justify paying more than 40 earnings for such a cyclical company. If there was a dark horse that provides me diversification (into the insurance sector) and a fair value (P/E ~ 11X), it would Power Financial (TSE: PWF) which I have owned before, but is not a consistent dividend grower. Lastly, I have also considered re-initiating a position in Inter Pipeline Ltd (TSE: IPL) and then selling my Kinger Morgan position in my RRSP in order to avoid overexposure to pipelines.

TFSA
With very little cash left in my TFSA, I don't foresee any transactions unless they are short-term trades to increase my position in Brookfield Infrastructure Partners L.P. (TSE: BIP.UN). Brookfield management's record of dividend growth is outstanding, as is there record of accreditive acquisitions. 

RRSP

Having decided to take a break from paying my discount brokerage $30 per quarter for a fair CAD/USD exchange rate, my plan for the third quarter is to use my cash and dividends to top-up my position in A&W Revenue Royalties Income Fund (TSE: AW.UN).  With a yield over 4.5%, and a P/E in the 20X range partely due to underwhelming first quarter results, I'm fine with adding to this position due to A&W's strategy of more urban locations throughout Canada.  The only US stock I would consider changing my plan for is Tanger Outlets (NYSE: SKT), as I find the long-term risk/reward equation favorable despite a slight recent run-up in share price. 

Since it's almost the middle of the year, it seems like an appropriate time to check-in on my simplified 2017 goal:

Increase forward dividend income by $2600 while achieving a dollar-weighted average organic dividend growth rate of at least 5%. 

I'm very happy to report that my forward dividend income is up by over $1000, while my dollar-weighted average organic dividend growth rate is currently 3.47%. If the forward income appears behind schedule, it's mainly due to growing my cash position in my unregistered account by about 125%. This reflects the difficulty I am having finding quality Canadian companies to invest in at fair prices. In contrast, if the 3.47% appears I am ahead of schedule, it is misleading as most of my holdings increase their dividends in the first half of the year. Although I think the 5% target remains achievable, it will require me putting capital to work in companies who raised their dividend by more than 5% while continuing to avoid dividend cuts.


Which companies appear at the top of your watch list for Q317 and how are you progressing toward your financial goals?
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As I grow older and my life becomes dominated with family, work, and other important commitments, passive index investing becomes more appealing. As documented regarding my two ETF experiment to index my son's registered education savings plan, I love the simplicity of quickly rebalancing the portfolio once a year. I don't track the ETFs at all and no monitoring is undertaken. The hard work to identify attractively priced stocks, accumulate a position over time, while monitoring company news for red flags is completely eliminated.

However, when I start to dig deeper into the composition of various Canadian indices that are featured in ETFs, the sector concentration is shocking. Even if you look at the broadest index in Canada, the S&P/TSX Composite Index, which covers approximately 95% of the Canadian equity markets, the combined exposure to financials (36.1%) and energy (19.9%) means 56% of your investment is concentrated in only two sectors. Key sectors for long-term growth such as information technology (2.9%) and health care (0.7%) are an insignificant portion of the index. With the top 10 holdings of the market capitalization weighted index accounting for 38.7% of the portfolio, returns are heavily reliant on financials (five of the top ten) and energy (three of the top ten). With 248 constituent companies, the market capitalization weighted index is heavily tilted toward the large financials, energy, and materials companies that dominate the Canadian landscape.

(Source: web.tmxmoney.com)

If the thought of including 248 companies is overwhelming, and you'd prefer to stick with the top 60 companies in Canada, maybe the S&P/TSX 60 Index would be a better fit. Although not as broad as the S&P/TSX Composite Index, the S&P/TSX 60 Index represents leading companies in leading industries. Its composition is also based on market capitalization, leading to even higher sector concentration in financials (38.4%) and energy (20.5%). The top 10 holdings represent 50.8% of the total index, reflecting high concentration in financials (five of top ten) and energy (three of top ten). Interesting long-term growth sectors such as technology (2.4%) and health care (0.4%) are basically a rounding error in the S&P/TSX 60 Index. 

(Source: web.tmxmoney.com)

As a investor with a strong preference for dividends, I also decided to examine the S&P/TSX Canadian Dividend Aristocrats Index. In order to be considered for this index, the company must have increased ordinary cash dividends every year for at least five consecutive years. Interestingly, instead of being weighted based on market capitalization, this index is weighted based on indicated annual divided yield. This means companies which higher dividend yields (i.e. Corus Entertainment, Northview REIT, Granite REIT, etc.) compose a higher percentage of the index. Despite this difference in weightings, financials (34.0%) and energy (18.3%) continue to account for over half of the index value. Information technology represents an insignificant 1.7% of the index, and there is no health care exposure. The top 10 holdings account for 22.1% of the index, reflecting the different weighting criterion.

(Source: web.tmxmoney.com)


The Canadian indices covered above clearly contain a great deal of exposure to the financial and energy sectors. One might go as far as to say that passive index investors in Canada are making very big bets for and against particular industrial sectors. Despite the simplicity and convenience that passive investing offers, I'll stick to dividend growth investing that allows me more control over the companies and sectors I'm investing in, even if it requires more work. Lastly, although I'm always a little hesitant when sharing the diversification of my portfolio by industry sector (see here for YE16), the above analysis makes me feel slightly better about my own sector diversification. 

How does your sector diversification compare to that of the leading Canadian indices???


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In April 2016, when I was looking to add a utility company to my investment holdings, I reviewed Five Canadian Companies with Growing Dividends. After initiating a position in Emera Inc. (TSE: EMA) in October 2016, and completing my position in May 2017, it seemed like an opportune time to update my tables in order to determine if other Canadian utility companies warranted further consideration for dividend growth investors. Included below in the initial table from April 2016, and an updated version for June 2017.

April 2016

CU
ATCO
FTS
EMA
AQN
P/Etrail
32.4
29.3
15.7
17.7
25.5
Yield
3.6%
2.9%
3.7%
4.0%
4.7%
EPS Payout
76.4%
74.0%
38.4%
63.3%
104.7%
# Years Div Gro
45
23
42
9
6
1-yr Div Growth
10.2%
15.2%
10.3%
18.8%
10.0%
5-yr Div Growth
10.1%
14.9%
5.6%
7.9%
9.9%
1-yr Rev Growth
-9.3%
-9.2%
24.1%
-3.4%
9.1%
5-yr Rev Growth
3.8%
3.2%
12.6%
11.8%
41.5%
1-yr EPS Growth
-55.9%
-63.5%
85.0%
-3.9%
45.0%
5-yr EPS Growth
-7.0%
-11.5%
10.2%
10.4%
8.8%
S&P Rating
A/Neg
A/Neg
A-/Neg
BBB+/Neg
BBB/Neg

June 2017

CU
ATCO
FTS
EMA
AQN
P/Etrail
18.7
17.6
22.4
18.2
39.4
Yield
3.5%
2.6%
3.5%
4.3%
4.5%
EPS Payout
53.8%
41.0%
51.5%
51.8%
186.3%
# Years Div Gro
46
24
43
10
7
1-yr Div Growth
10.0%
14.9%
6.7%
10.0%
10.0%
5-yr Div Growth
10.1%
14.9%
5.6%
8.7%
8.9%
1-yr Rev Growth
4.30%
-0,7%
7.4%
53.5%
7.1%
5-yr Rev Growth
2.6%
0.3%
20.1%
23.0%
52.4%
1-yr EPS Growth
26.6%
7.9%
1.6%
-20.3%
0.0%
5-yr EPS Growth
1.7%
-3.0%
6.90%
12.2%
29.2%
S&P Rating
A/Neg
A/Neg
A-/Sta
BBB+/Neg
BBB/Sta


Here are some quick observations about each of the companies.

- A material improvement in earnings makes Canadian Utilities (TSE: CU) look cheaper from a valuation perspective and decreased their payout ratio. Although the dividend growth remains consistent around 10%, the company will ultimately have to increase their revenues and earnings in order to maintain the impressive dividend growth record.
- Atco (TSE ACO.X) is Canadian Utilities' parent company, and their earnings improvement also led to a cheaper valuation and lower payout ratio. Sacrificing a lower current yield in favor of 15% dividend growth might lead an investor to favor Atco over Canadian Utilities.
- Fortis (TSE: FTS) looks to successfully integrate their material US acquisition in order to continue their long history of dividend growth. Over the past year, slower EPS growth has led to the company appearing a tad overvalued based on their historic P/E multiple.
- Emera (TSE: EMA) also looks to continue successful integration efforts in order to support revenue growth. The company's P/E multiple has expanded and investors expect management to announce another 10% dividend raise this summer.
- Algonquin Power and Utilities (TSE: AQN) continues to perform strongly as their valuation grows in response to an impressive record of revenue and EPS growth. Note that using EPS in the P/E multiple and payout ratio might be ill-advised as some sort of free cash flow measure is likely more apt.

Although none of the above Canadian utility companies leap off the page at me, I think they are priced fairly in the context of the overvalued Canadian market.


Do you hold or are you interested in any of the five utility companies outlined above? 
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Instead of droning on about one topic today, here are three things that are top of mind. 

1. Activist Investors Push Granite REIT to Change

When I initiated a position in Granite REIT last spring, it was their combination of cheap P/FFO valuation around 10X and the above-average 4.5% distribution growth that attracted me to the company. Granite's management had just wrapped up a strategic review and decided to stay the course instead of taking any drastic action (i.e. a large strategic acquisition or divesture, putting itself up for sale, or paying a material one-time distribution). My investment in Granite REIT was a way for me to gain exposure to Magna (Granite's largest tenant), which is one of a handful of world-class companies we have in Canada, at an entry yield about double what Magna was paying at the time (6% vs 3%). 

A couple weeks ago, FrontFour Capital Group and Sandpiper Group announced they had acquired a 6.2% stake in Granite REIT and released a plan to "unlock value at Granite REIT". FrontFour and Sandpiper have proposed two of their directors for the upcoming election of Granite's board of directors. At a very high level, Frontfour and Sandpiper argue that Granite trades at a substantial discount to its fair value due to a misunderstood asset base, strategic failures, and a loss of confidence in management and the Board. Granite responded somewhat on their Q1 2017 earnings call and more detailed via this proxy circular.

As a unit holder of Granite, the attention that the activist investors have shed on the company has been beneficial from a share appreciation perspective. Frontfour and Sandpiper raise some relevant issues concerning Granite's lack of strategic action, overcompensated management team, and misunderstood asset base. However, Granite's response to their dissident shareholders also makes some prevalent points about the returns they have been able to generate shareholders over the past five years in excess of the TSE REIT index, the lack of successful track records of FrontFour and Sandpiper within the REIT space, and the absurdity of some of the activists' suggestions (i.e. selling some major holdings around Toronto to show stakeholders how much they are truly worth). 

With both sides continuing to argue their respective stances, I'm taking a wait a see approach as this is the first time one of my holdings is the target of activist investors. Even if FrontFour and Sandpiper are able to elect their two nominated directors to Granite's board, I question if they could push their agenda given strong opposition from the majority of directors. My view is that the activists have brought some additional coverage to Granite, forcing the company's management to justify their past inaction and firmly outline the path they are pursuing for future growth.

2. Special Prosecutor and Impeachment Talks Create Buying Opportunity

For those of you who keep close track of my Investment Holdings, you may have noticed some recent changes. The past week was officially my busiest ever, with three buys including initiating a new position in my Tax Free Savings Account. The combination of letting my cash build up to an uncomfortably high level (~8% of total holdings) and the downward momentum caused by the appointment of a special prosecutor to review the Trump Administration's ties to Russia both facilitated my three purchases. I'm considering another couple of investments outlined in my Q2 2107 watch list, and hope for continued volatility in the markets in the coming weeks. 

3. Inconsistent Posting Schedule

As I struggle to meet my once a week posting goal, I feel that I owe an explanation to readers. Beyond my current lack of ideas for interesting posts, more time spent preparing for the software launch I've been working on at my job over the past two years, and quality time required by my super energetic near three year-old son, I have another great reason for my inconsistent posts. My wife and I are expecting our second child early this July. There have been numerous preparations for the birth of our baby daughter that have caused a shift in my priorities. Although I enjoy writing as an outlet and have always found it beneficial to review my decisions relating to past stock purchases/sales, with the more outward focus of this blog, I'm finding less time to make quality posts that would provide value to readers beyond myself.  My expectation is that the number of entries I write will continue to decrease over the summer when our daughter arrives and likely continue on a downward trajectory for the foreseeable future. 


Did you take advantage of the US market selloff this week to make any stock purchases???


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