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INVESTING THE CANADIAN WAY

  • Dividend Investing
    • Canadian Dividend Aristocrats 2021
  • Best Canadian Stocks
  • GRAB YOUR BOOK

Mike

Possibly the Best List to Start Investing from is the Canadian Dividend Aristocrats 2021

This Canadian Dividend Aristocrats guide will not only provide you with a list of stocks, but it will come with a methodology to select the right companies for your portfolio. We will also provide you with our favorite aristocrats.

The Canadian dividend aristocrats is the little brother of a much larger and world-known dividend grower list. Dividend growth investors are familiar with the popular U.S. Dividend Aristocrats List. This list of dividend growers with over 25 consecutive years of dividend increases is famous around the world. What about Canadians? Do we have companies showing 25+ years of consecutive dividend increases?

While Canada does have a few companies that achieved that feat, the Canadian dividend aristocrats list would be too short if we would include them based on the US requirement. Canadian Aristocrats are companies that have increased their dividends for 5 consecutive years.

While many investors may think this is not enough to give an elite title to a company, I tend to disagree. I love picking stocks that have just started increasing their dividends and are on their way towards a great future. This is a unique opportunity for investors to select high quality companies and still enjoy stock price appreciation going forward. We all wish we bought shares of Coca-Cola (KO) 50 years ago when it was a young dividend grower. You have a similar opportunity with the Canadian dividend aristocrats.

If you want to skip directly to the good stuff, download our Best Canadian Aristocrats Selection here:

Canadian dividend growers

Which Canadian stocks are included in the Dividend Aristocrats list?

As opposed to the U.S. Aristocrats, Canadian companies don’t have to show 25 years of consecutive dividend increases. In fact, even the 5 years minimum requirement isn’t as strict as we would think. Here’s the short list of requirements Canadian companies must meet to earn the Aristocrat title:

  • The company’s common stock must be listed on the Toronto Stock Exchange and be a constituent of the S&P BMI Canada. Stocks listed on the TSX venture, such as Sylogist (SYZ.V), aren’t eligible.
  • The company’s market capitalization (Float-adjusted) must be at least $300M. We want companies of a minimal size. Yet $300M is quite permissive.
  • The increase in regular cash dividends for 5 consecutive years, but companies could pause their dividend growth policy for a maximum of 2 years within a said 5-year period. In other words; as long as the company intends to share the wealth, it has a good chance of being included among the elite dividend growers.

Canadian aristocrats Vs. U.S. aristocrats

Needless to say, it is easier to become a Canadian aristocrat than a U.S. aristocrat! To become a U.S. aristocrat, companies must:

  • Be a member of the S&P 500
  • Show 25+ consecutive years of dividend increases
  • Meet certain minimum size & liquidity requirements

It would be foolish to think selecting any aristocrats out of the list would make a good investment. On both sides of the border, we regularly see companies getting added or withdrawn for the list. This means the list you see in 2020 is those only who survived the test of time.

This article will not only provide you with a list of promising stocks, but it will also come with a methodology to select the right companies for your portfolio.

What are the Canadian dividend Aristocrat for 2021?

The list below contains 81 Canadian Dividend Aristocrats as of early 2021. They are among the best Canadian dividend stocks. However, this list can be expected to change following the current pandemic situation. Dividends are one of the items companies tend to cut when feeling liquidity pressure.  Some companies have already announced a dividend cut or suspension and will be taken off the list in 2021. We have identified companies that won’t be listed as aristocrats next year with an asterisk.

You will also find very few Technology sector companies on the list as that sector has never been known for their steady cash payments to shareholders. You will, however, find many Financial Services companies along with some Industrials.  Those two sectors have been and continue to be well established dividend payers.

Canadian Dividend Aristocrats per Sector

Companies with an asterisk next to their name will be taken off the official list in 2021 as they have either cut or suspended their dividend during the pandemic.

You can download the complete list with additional metrics such as dividend growth, dividend yield, revenue growth, P/E ratio, etc. by clicking on the following button:

Ticker Name Sector
RY.TO Royal Bank of Canada Financial Services
TD.TO The Toronto-Dominion Bank Financial Services
CNR.TO Canadian National Railway Co Industrials
BNS.TO Bank of Nova Scotia Financial Services
ENB.TO Enbridge Inc Energy
BAM.A.TO Brookfield Asset Management Inc Financial Services
BMO.TO Bank of Montreal Financial Services
TRI.TO Thomson Reuters Corp Industrials
BCE.TO BCE Inc Communication Services
TRP.TO TC Energy Corp Energy
CM.TO Canadian Imperial Bank of Commerce Financial Services
ATD.B.TO Alimentation Couche-Tard Inc Consumer Defensive
MFC.TO Manulife Financial Corp Financial Services
FNV.TO Franco-Nevada Corp Basic Materials
CNQ.TO Canadian Natural Resources Ltd Energy
GWO.TO Great-West Lifeco Inc Financial Services
SLF.TO Sun Life Financial Inc Financial Services
T.TO TELUS Corp Communication Services
FTS.TO Fortis Inc Utilities
NA.TO National Bank of Canada Financial Services
L.TO Loblaw Companies Ltd Consumer Defensive
IFC.TO Intact Financial Corp Financial Services
MG.TO Magna International Inc Consumer Cyclical
POW.TO Power Corporation of Canada Financial Services
PPL.TO Pembina Pipeline Corp Energy
DOL.TO Dollarama Inc Consumer Defensive
WN.TO George Weston Ltd Consumer Defensive
SAP.TO Saputo Inc Consumer Defensive
MRU.TO Metro Inc Consumer Defensive
IMO.TO Imperial Oil Ltd Energy
EMA.TO Emera Inc Utilities
AQN.TO Algonquin Power & Utilities Corp Utilities
OTEX.TO Open Text Corp Technology
CCL.B.TO CCL Industries Inc Consumer Cyclical
CTC.A.TO Canadian Tire Corp Ltd Consumer Cyclical
EMP.A.TO Empire Co Ltd Consumer Defensive
CAR.UN.TO Canadian Apartment Properties Real Estate Investment Trust Real Estate
CU.TO Canadian Utilities Ltd Utilities
QBR.B.TO Quebecor Inc Communication Services
RBA.TO Ritchie Bros Auctioneers Inc Industrials
FSV.TO FirstService Corp Real Estate
TIH.TO Toromont Industries Ltd Industrials
ONEX.TO Onex Corp Financial Services
TFII.TO TFI International Inc Industrials
PKI.TO Parkland Corp Energy
IAG.TO iA Financial Corp Financial Services
RNW.TO TransAlta Renewables Inc Utilities
KEY.TO Keyera Corp Energy
BLX.TO Boralex Inc Utilities
AP.UN.TO Allied Properties Real Estate Investment Trust Real Estate
INE.TO Innergex Renewable Energy Inc Utilities
BYD.TO Boyd Group Services Inc Consumer Cyclical
CCA.TO Cogeco Communications Inc Communication Services
GRT.UN.TO Granite Real Estate Investment Trust Real Estate
FTT.TO Finning International Inc Industrials
CHP.UN.TO Choice Properties Real Estate Investment Trust Real Estate
ACO.X.TO Atco Ltd Utilities
PBH.TO Premium Brands Holdings Corp Consumer Defensive
MIC.TO Genworth MI Canada Inc Financial Services
CPX.TO Capital Power Corp Utilities
STN.TO Stantec Inc Industrials
MFI.TO Maple Leaf Foods Inc Consumer Defensive
ENGH.TO Enghouse Systems Ltd Technology
SRU.UN.TO SmartCentres Real Estate Investment Trust Real Estate
SJ.TO Stella-Jones Inc Basic Materials
OR.TO Osisko Gold Royalties Ltd Basic Materials
CWB.TO Canadian Western Bank Financial Services
CSH.UN.TO Chartwell Retirement Residences Real Estate
SMU.UN.TO Summit Industrial Income REIT Real Estate
IIP.UN.TO InterRent Real Estate Investment Trust Real Estate
TCL.A.TO Transcontinental Inc Industrials
EQB.TO Equitable Group Inc Financial Services
CRT.UN.TO CT Real Estate Investment Trust Real Estate
NWC.TO The North West Co Inc Consumer Defensive
GSY.TO goeasy Ltd Financial Services
ITP.TO Intertape Polymer Group Inc Consumer Cyclical
EIF.TO Exchange Income Corp Industrials
CGO.TO Cogeco Inc Communication Services
ARE.TO Aecon Group Inc Industrials
FSZ.TO Fiera Capital Corp Financial Services
SIS.TO Savaria Corp Industrials

3 Steps to select the right aristocrats for your portfolio

As previously mentioned, going “all-in” with Canadian aristocrats may not make your portfolio any better. After downloading the Canadian dividend aristocrat lists, you can apply the following steps to ensure you pick only the best stocks possible.

#1 Focus on the sector you need

Whenever you isolate certain metrics, you will notice that certain sectors will be generally strong. This is because each sector thrives or faces tailwinds at different times. The timing of your research will determine which sector offers you the best opportunities. Unfortunately, you can’t buy all your stocks from the same sector. The DSR recession-proof workbook will guide you in this regard.

I would rather buy the best of breed for each sector than buy 4 stocks from the same industry. This will help my diversification and smooth my total returns over time. For example, the fact I had many tech stocks in my portfolio protected me to some extent from the March 2020 crash. Tech, utilities and consumer defensive stocks held the fort while my financials, industrials and consumer cyclicals were getting killed. Even more importantly, that diversification helped my portfolio bounce back relatively quickly.

#2 Start with the dividend triangle

If you have been following me for a while, you know that I’m a big fan of what I call the Dividend Triangle. This simple focus on three metrics will reduce your research time and help you target companies with more robust financials. I start all my searches with a look at companies showing strong revenue growth, earnings growth and dividend growth over the past 5 years. The detailed explanation is found in our recession-proof workbook, and I invite you to read and re-read that workbook as necessary.

First, download the Canadian dividend aristocrats list. Then, in a few simple clicks, you will set the filters and you can start hunting for the best stocks for you at that moment in time.

By selecting only companies showing positive numbers in the 5yr Rev growth, 5yr EPS growth and 5yr Div growth columns, you will find those companies with a positive dividend triangle.

This methodology covers all “regular companies”, but not REITs and other businesses that use non-conventional metrics instead of EPS. We will address those types of companies later in this letter.

#3 Priority to dividend growth, not yield

Now that you have narrowed down the number of stocks, it is time to trim that list further. Throughout the years, most of my best stock picks have been found amongst the strongest dividend growers. When you think about it, it totally makes sense. Those companies must earn increasing cash flows and show several growth vectors to be confident enough to offer a 5%+ dividend increase year after year.

Past dividend growth is a result of several good metrics at the same time. This usually means stronger revenue, consistent earnings growth, increasing cash flow and debt that is under control. We’ll dig into the other metrics later, but at first glance, a strong dividend grower will likely come with other robust metrics.

While not all my holdings show such strong dividend growth, I always search for the strongest dividend growers when selecting a new stock for my portfolio.

Using this simple 3 step methodology will narrow down your search to a few stocks per sector. It will make your final selections easier and your portfolio will likely perform better over the long run.

How to Calculate a Fair Value for Canadian Dividend Aristocrats

Valuation does play a major role in the buying process. However, this should not be the single factor that determines whether you buy or not. This is one factor among many. To be honest, I would rather buy an “overvalued stock” with a strong dividend triangle, great growth vectors and lots of potential for the next 10 years than buying an “undervalued stock” that has nothing else but a good yield and a poor valuation.

When I find a company I really like, but the valuation seems ridiculous, I’ll be tempted to put it on a watch list and wait for a while. I usually build this watch list on the side and when I’m done with one of my current holdings (e.g. the company doesn’t meet my investment thesis anymore), I pull out the watch list and check to see if valuations have changed. Once again, I’ll pick any “Alimentation Couche-Tard” (overvalued, strong growth) over any “Suncor” (undervalued, modest growth) of this world.

PE Ratio

At DSR, we use mostly two methodologies to determine a stock’s valuation. The first one is to consider the past 10 years of price-earnings (PE) ratios. This will tell you how the stock is valued by the market over a full economic cycle. You can then determine if the company shares enjoyed a PE expansion (price grows faster than earnings) or if the company follows a similar multiple year after year.

Dividend Discount Model

When you look at stocks offering a yield of over 3% with a stable business model, the dividend discount model (DDM) could be of great use. Keep in mind the DDM gives you the value of a stock based solely on the company’s ability to pay (and grow) dividends. Therefore, you will find strange valuations when you look at fast-growing companies with low yields (e.g. Alimentation Couche-Tard!). Find out more about the DDM model and its limitations here.

While the idea of receiving dividends each month is seducing, this is not what makes dividend growth investing magic. It’s the combination of capital growth and dividend growth (read total return) that truly generates the magic in your portfolio. You can download the complete list with additional metrics such as P/E ratio, dividend growth, dividend yield, revenue growth, etc. by clicking on the following button.

Best Canadian Dividend Aristocrats for 2020

Searching through almost 100 stocks could become tiresome. Using the Dividend Stocks Rock investing methodology, I’ve selected my favorite Canadian Dividend Aristocrats. You can download a complete eBook on our best Canadian Aristocrats here.

Alimentation Couche-Tard (ATD.B.TO)

Alimentation Couche-Tard ATD.B.TO

Business Outlook

Alimentation Couche-Tard operates an extensive network of convenience stores across the world. North America, Ireland, Scandinavia, Poland, Russia and even the Baltics are the homes to their operations. Revenue sources are divided into 3 major categories: merchandise and services, road transportation fuel, and others. In the last 2 decades, management has been focusing on growing the company via acquisitions.  This has been a successful strategy as evidenced by their stock growing from $2.40/share in 2009 to their peak of $46.10 in early 2020.

ATD.B.TO shows an annualized dividend of $0.28/share which equates to a yield of around 0.60%. This is obviously not the juiciest yield around, but the resilience of their business model, especially with the current pandemic, has proved to be a winner. Now in its 12th year of annual dividend increases (split-adjusted), the company has proven that their business is capable of significant growth and value enhancement.

Potential Risks

The management has proven themselves to be quite adept at using acquisitions to grow their business, but inherently that method of growth has a healthy dose of risk associated with it.  Non-organic growth presents its own share of risks when it comes to identifying the right targets, the integration of the companies, and the synergies realization. With fuel consumption forecasts being lowered globally, ATD.B.TO may face some challenges down the road when it comes to demand for their core products.

Canadian National Railway (CNR.TO)

Canadian National Railway CNR.TO

Business Outlook

What would the Canadian economy be without an extensive railroad network?  CNR.TO built a coast to coast railway that delivered over 6M carloads last year over their 19,600 miles of track. Revenues are spread across several segments.  Most notably intermodal containers, petroleum and chemicals, grain and fertilizers, and forest products.  As the Canadian economy expanded and diversified, CNR.TO always has been a key player to move products across the vast territory of the Canadian nation.  The stock price had soared to a high of $127.79 in early 2020, which represents a 224% gain since 2012.

CNR.TO yields slightly under 2% with its annual dividend of $2.30. The fundamentals of this business are strong, and that should present the opportunity for further dividend increases in the future.  Over the last five years the dividend was increased by 16.54%.  Strong dividend growth should continue over the next five years and beyond.

Potential Risks

CNR.TO’s operations are fraught with risks. Railways confront harsh weather, ongoing maintenance costs, and management of both physical and personnel assets.  Management also has the challenge of responding to the organic growth of Canada’s overall economy. Key segments of the Canadian economy like forest products, oil and grains should be closely monitored as rail is often the primary way for those products to be brought to market.

Fortis (FTS.TO)

Fortis FTS.TO

Business Outlook

Fortis operates utility transmission and distribution assets across Canada and the United States. The company has a customer base of around 2.5M, which is split between gas and electricity consumers. The company holds smaller stakes in electricity generation and Caribbean utilities, which helps FTS.TO to generate 66% of its earnings outside of Canada. They also hold 16,000 miles of high-voltage transmission lines that power their distribution network.

FTS.TO shows a yield slightly above 3.50%, which is on the low side compared to its utility peers. Low yield aside, the company has invested massively in its operations, and has proven itself to be a solid bet for future growth. Management has deployed a 5-year investment plan with the goal being growing, sustainable, and quality dividends.

Potential Risks

Utility companies typically show low to mid single digit growth over time.  FTS.TO also recently acquired 2 businesses in the U.S. in pursuit of additional growth.  Taking on operations south of the US/Canadian border may quickly become a money pit as economies of scale may or may not be realized. Development in “foreign” markets should be undertaken with care as they may also face added competition and margin pressure.

Royal Bank of Canada (RY.TO)

Royal Bank RY.TO

Business Outlook

The largest bank in Canada, RY.TO, provides financial services to individuals, commercial and institutional clients. Their commercial banking segment makes up 50% of the bank’s revenue which makes it a powerhouse amongst the Big 5 Canadian banks. Although most of its operations are concentrated in Canada, they also expanded into the US in 2015 by acquiring City National Bank whose focus was on wealth management operations with their high net worth clients.

Canada’s largest bank pays an annual dividend of $4.20/share which translates into a current yield near 4.50%. The company has increased its dividend twice per year for the last couple of years. This additional dividend growth was at least partially funded by their impressive growth in insurance, wealth management and the capital markets sectors.

Potential Risks

Capital markets are often the main risk for a bank where the impact of mistakes can be felt across all the bank’s operations.  RY.TO has an accentuated exposure to the housing market, and a pandemic caused recession where people are struggling to pay their bills might put significant pressure on their margins.

 

Telus (T.TO)

Telus T.TO

Business Outlook

In the communications industry, we have Telus, which enjoys a nearly 30% market share in its industry. Their 9M subscribers are offered television services, landline phones, and internet. The company has configured many homes with fiber on its wireline footprint.  T.TO also presents interesting and growing profits in its wireless segment, which has grown dramatically since 2010.

T.TO pays a quarterly dividend of $0.29125 leading to an annual yield of nearly 5%. The company was able to generate an 8.18% dividend increase over the past 5 years and is well-positioned to make significant strides in profitability with their new 5G network.

Potential Risks

T.TO is one of the Big 3 communications companies in Canada. The only problem with that is that even the Federal Government wants to see more competition in this industry. They could face more competition in the future which could potentially lower their prices on existing products and services and degrade their margins.

 

Open Text Corporation (OTEX.TO)

Open Text (OTEX.TO)

Business Outlook

Open Text has created a specialized business in the technology sector. Managing, integrating, and classifying raw data, as part of an Enterprise Information Management (EIM) system is the core business of OTEX.TO. The company has secured many large customers for their services including Governments, multinational corporations, and various institutions. Since the company’s inception in 1991, management has focused on growth by acquisition, and they have successfully completed a dozen acquisitions to attain their current level of operations.

OTEX.TO started paying dividends in 2013, which is unusual for a technology company that typically focuses on growth. Paying out an annual $0.6984/share dividend yields just under the 5% mark. They are now in their 6th year of increasing dividends, and the company has added the necessary expertise in its operations to sustain payout growth for years to come.

Potential Risks

Remember that OTEX.TO operates in the tech sector, and that means the company faces many of the giants we all know about. It is a fast-paced environment that requires quick responses to opportunities and outstanding operating flexibility. Acquiring companies is a good way to grow your business volume, but it also brings its own share of risks.

Falling Canadian Aristocrats

The pandemic outbreak early in 2020 brought a lot of volatility and uncertainty to both businesses and their employees. With multiple companies closing at least temporarily, many companies tried to make a digital turnaround to cope with the “new reality”, and of course, many other companies simply couldn’t afford to close temporarily or restructure their operations, and they simply had to close permanently.

Those who felt excessive pressure and tried to preserve liquidity by cutting their dividends might be pushed off the precious Aristocrats list.  Cutting the dividend doesn’t automatically exclude the aristocrat from the list. The company still has until the end of the year to reinstate its distribution and possibly add to their dividend to make the list. We think that is unlikely to happen with any of the below companies.

Here are some of the companies that face a tough situation:

Company Sector Situation
CAE Inc Industrials – 10.5k employees laid off

– Dividend and share repurchase suspended

– Salary Freezes

Gildan Activewear Inc Consumer Cyclical -Recorded a $100M loss in Q1

-Quarterly dividend suspended

-Seniors and Execs halved their salaries

Inter Pipeline Ltd Energy -Revenue down 8.4% at Q1 YoY

-72% dividend cut in Q1

-Directors cutting their salaries

Laurentian Bank Financial Services -Profit fell 79%, PCL soaring

-Dividend cut by 40%

-First dividend cut by a Canadian Bank since 1992

Methanex Corp Basic Materials -Demand declined 7%, historically low prices

-Dividend cut by 90%

New Flyer Industries Inc Consumer Cyclical -Idling plants, 300 lay offs

-Dividend cut in half

-Expansion plans shelved

Richelieu Hardware Ltd Consumer Cyclical -No dividend declared in Q1

-Significant ST debt, total debt up 105% from Q4 2019.

Sleep Country Canada Holdings Inc Consumer Cyclical -Net income down 36%

-Dividends and share repurchase suspended

-Expansion and capital spending halted

Suncor Energy Inc Energy -Low commodity prices, operating loss of $309M

-55% dividend cut

-Revised capital spending down twice in Q1

The impact of COVID-19 on Canadian dividend aristocrats

As you may have noticed, the predominant sector affected by the pandemic is Consumer Cyclical. These non-essential businesses face a huge reduction in demand for their products and services, and their profitability has been and will continue to be impacted substantially.

The other important sector of the TSX that was affected by this pandemic induced recession is the energy industry. Since most companies involved in this sector rely on the volatile price of oil and gas commodities, they usually are challenged to grow their dividend. For this reason, you won’t find many of them on the Canadian dividend aristocrats list.

Obviously, the repercussions of a pandemic induced recession are hard to quantify and even harder to predict given our lack of experience with this type of recession. Businesses now face an unknown threat which puts their operational flexibility to the test. More stocks may be bumped off the Aristocrats list by the end of 2020 as the financial impacts evolve over the coming months.

I know how hard it is to invest when stocks don’t seem to trade at their fair value

Don’t you hate not knowing when to buy or sell stocks? There are too many investing articles contradicting one another. This creates confusion and leaves you with the impression you may not reach financial independence. It doesn’t have to be this way. We have created a free, recession-proof portfolio workbook which will give you the actionable tools you need to invest with confidence and reach financial freedom.

This workbook is a guide to help you achieve three things:

Invest with conviction and address directly your buy/sell questions.

Build and manage your portfolio through difficult times.

Enjoy your retirement.

FREE WORKBOOK

Disclaimer: I hold shares of ATD.B, FTS, T, RY, OTEX, CNR.

Best Canadian Telecom Stocks and Communication Services

Best Canadian Gold Stocks and Basic Materials

How to Buy Canadian Stocks

The best way to improve your financial situation and retire stress-free is to invest. But how do you buy Canadian Stocks? Which one should you be buying? Do you need a financial advisor or can you simply buy stocks on your own?

I’ve asked myself all those questions before I made my first trade on the market. At first, I felt overwhelmed by the information about the stock market. I didn’t know where to start, which type to account to choose and which investing strategy (do you need one?) to pick. Fifteen years after I first bought my first shares of Power Corporation (POW.TO), I take a look back at what I’ve learned to help you start today (and avoid some of the mistakes I’ve made!).

I remember the very first thing I did once I got my first stable job was opening an investment account. I was fortunate enough to meet with the right people telling me at a young age that the best way to build wealth was through investing. At the age of 23, I didn’t have much financial responsibility, and this was the perfect timing to start saving and investing. However, before opening a brokerage account and buying stocks of the first company that comes to my mind, I should have take the time to build a real plan.

Here are the steps I should have followed before making my first investment. This is a complete article that will be updated as I add more content to each section. You don’t need to read it in one shot (just bookmark it!). Just take one step at a time and you will learn how to buy stocks.

Step #1 Know yourself and know where you are going

Before you even think to buy stocks, you must first draw the picture of your financial situation and write down why you invest. Do you….

  • Wish to retire early or comfortably?
  • Fund your children education?
  • Buy a rental property or vacation property by the lake?
  • Or you just want to save money “just in case”?

Answering those questions, looking at your current financial situation and determining your risk tolerance will tell you a lot about the type of investing strategy you should pick (we will cover that later down the road).

The “classic and boring” investor profile questionnaire meets this purpose. Why is it so important to complete such questionnaire before you start investing? Because once you invest and the storm gets in and you lose money, it will be too late to know if you were able to handle it or not. It’s better to know if you are able to look down the cliff before you jump right?

The best questionnaire I found so far isn’t coming from a bank or an investing firm (that adds to the credibility!). In fact, it’s coming from the Financial Market Authority of Quebec (L’autorité des Marchés Financiers). You can give it a try here:

Investor profile questionnaire

Step #2 You need a brokerage account

Now that you know why you invest, it’s time to know how you can buy stocks on the market. Forget about movies where you call some shady brokers at their desk, you can do everything on your own!

A brokerage account is basically a platform enabling you to buy and sell stocks on the market. You can have multiple different accounts (RRSP, TFSA, RESP, etc.) with the same online broker. The money is being transferred from your bank account to your brokerage account as any other electronic fund transfer. Then, you can start buying stocks.

You can open an online brokerage account at your bank or you can go the savvy route and opt for Questrade. Questrade is a safe online broker offering the lowest fees. While most banks will charge you around $9.99 each time you buy or sell stocks, Questrade will do it for a starting price of $4.95. After that, shares are .01 each, to a maximum of $9.95.

For example, if you buy 100 shares of Royal Bank (RY.TO), you will pay $4.95 + $0.01*100 = $5.95. That’s 40% discount vs any other bank. Plus, if you want to buy ETFs (Exchange Traded Funds), you do it for free!

You can open an account with Questrade today and start with $50 in free trades.

Step #3 Canadians can choose among plenty of account types

When you open a brokerage account, you have the choice of opening multiple types of accounts. Each account is getting taxed differently and has different purposes. In general, all stocks and ETFs can be bought through any account types. Here are the choices will have:

Cash & margin accounts

The cash account is the most straightforward of them. You can trade any type of investments in this account. However, there are no tax deductions when you invest money. Profit, interest or dividend are also subject to taxes.

This type of account can be managed individually (by yourself) or joint (with your spouse for example).

RRSP (Registered Retirement Savings Plan)

This is probably the most classic account type if you plan to retire. The RRSP is well-known by Canadians for its tax advantages. Whenever you invest money in your RRSP, the “contribution” is being deducted from your declared income on that year. Also, all profit, revenue or dividend made inside a RRSP is tax sheltered (you don’t pay taxes on them). On the other side, when you withdraw money from your RRSP account, the amount withdrawn will be added as a revenue in your tax report.

TFSA (Tax Free Savings Account)

Here’s the most flexible and tax optimized investing account for Canadian! The TFSA has been designed to shelter your investment from taxes. When you buy stocks in your TFSA, the “contribution” will not be deducted from your income. In other words; there is no tax return on your contributions. All profit, revenue or dividend made inside the TFSA is tax sheltered (no more taxes!).

The good news is you can withdraw money from this account at any year and never pay taxes on your withdrawals. Even better, you can put that money back the following year without any penalty (or obligations!).

RESP (Registered Education Savings Plan)

This is probably the most complicated account as it is not designed for you, but for your children tuitions. I will cover this account later down the road with a complete article on it. In the meantime, what you need to know is that both Federal and Provincial Governments will grant subsidies according to the amount you invest. Plus, all profit, revenue or dividends earned in this account is tax sheltered. The purpose of the RESP is to help you pay for tuitions.

TFSA or RRSP?

As you can see, chances are you will have to make the decision between having a TFSA or a RRSP. Most investors will end-up with both. If you are starting in the investing world, I think the TFSA would allow you more flexibility than the RRSP.

Step #4 Which type of investment is offered to Canadians?

Now that you have opened a brokerage account and you have selected the right account type, we are now one step closer in learning how to buy stocks. This section covers the type of investment you can buy.

While there are hundred of ways to buy stocks, we’ll focus on a few products that are simple to understand and will get you started. Because time is money and time in the market is everything.

Robo-Advisor

If you are completely new to investing and you don’t want to get your feet too wet at first, Robo-Advisors are probably the best solution. A Robo-Advisor is a proven recipe that has been cooked and assembled for you. All you need to do is to pick your asset allocation according to your taste (risk tolerance) and you invest your money in this “recipe”.

Fees are relatively low for a complete “packaged and managed” solutions and you don’t have to worry about anything. Robo-Advisors create portfolios using specific ETFs to cover all assets classes. In a single transaction, you buy hundred of stocks and get a fully diversified portfolio instantly.

ETF (don’t even think of mutual funds)

We are not going to cover mutual funds here because A) they are expensive and B) they don’t do better than ETFs in most cases.

Exchange Traded Funds (ETFs) are packaged investment products replicating a market, a sector or a strategy. For example, one of the largest Canadian ETFs is the ISHARES S&P TSX 60 INDEX ETF (XIU.TO). This ETFs will mimic a portfolio that would include the 60 stocks included in the … TSX 60 (the 60 largest companies trading on the Toronto Stock Exchange). Therefore, instead of buying individually 60 stocks and make sure that each of them shows the same weight in your portfolio, a single transaction give you access to this “bundle”. If the TSX 60 goes up by 4%, the ETF will follow very close behind (as there is still small fees to pay). In the specific case of the XIU, its management fees are 0.18%. Therefore, the XIU would show a return of 3.82%. Not bad for not having to manage 60 stocks portfolio, huh?

There are plenty of ETFs combinations and strategies possible and we will cover them in the future.

Stocks

If you don’t trust someone else to manage your money because nobody cares more about your portfolio than you do, buying individual stocks is the strategy you must follow. Buying stocks isn’t as overwhelming as it seems. What you need is a clear strategy determining where you will put your focus. There are several thousand stocks on the market, you can’t (and don’t want) to buy them all. Focusing on specific stock market areas will help you saving time and make the right investments for you.

Then, through a straightforward process, you will identify which stocks to buy and how much to invest in each position. I’m sharing key metrics I look at before buying any shares in step 8 of this article. In the upcoming sections, you will learn how to buy stocks and build a strong portfolio.

Other investment products

There are obviously a lot more to cover when you consider investing. If you are reading this article, this means you are at the beginning of your investing journey. You don’t necessarily need to know and master all type of investments. My most important advice at this point is to keep your portfolio simple. You don’t need the latest investment strategy combining options, preferred shares and leveraged ETFs. You just need to learn how to buy stocks and build a solid portfolio. Now let’s get started.

Step #5 Transfer money in [this is exciting]

At the time to open your brokerage account in step #2, you already linked your investment account with your bank account. This is how you will transfer money into your investment account in the first place. You can either transfer a lump sum of money or start by periodic payment plan.

The lump sum transfer will allow you to buy larger amount of stocks in one transaction. However, it could take time to save before you can start investing. If you have a large amount coming from an heritage, the sale of a property or a pension plan transfer, you should transfer it directly to your brokerage account and start investing.

You can start with as low as $25/month

Depending on your brokerage account, you can start a periodic payment plan for as low as $25/month. Now, there is no excuse preventing you to start buying stocks! If you start with less than $100/month, you are better off looking at ETFs instead of stocks. You will gain immediate diversification and you can buy ETFs for free through Questrade.

Periodic payment plan can be done weekly, bi-weekly (to time with your paycheck!) or monthly. It’s a great way to automate your saving habit and not thinking about it anymore. You will learn to live without this amount in your budget. This is another version of “pay yourself first” strategy.

Dollar Cost Averaging (DCA)

Periodic payments also enable you to use a strategy called dollar cost averaging. Since you will be buying more stocks or ETFs periodically, your cost of purchase (the price you pay per share) will be average up when the market is doing well and average down during challenging period.

Throughout time, you will have money invested at peaks, but also at bottom levels. When you buy during down markets, you get more shares for your bucks. When markets rise, you get to enjoy the ride and buy at each level.

The key in both strategy (buying stock with a lump sum vs DCA) is to stick with your strategy and not wait. Time in the market will be the greatest source of your return. Don’t ruin it by waiting.

Step #6 A few key definitions before you start

Now that you have money ready to buy stocks, it’s time to get a few key definitions before you place your first order. Some of them are basic terms, but some may surprise you. Let’s do a quick tour of some common terms used in the financial world.

Common Shares/stock

This is what we refer as a “stock”. When you buy stocks, you buy common shares of a company. This is a small (tiny winy) portion of a business. Holdings common share entitled you to have rights on your part of the company’s value, receive dividend (if any) and go to shareholder meetings.

Preferred Shares

Similar to common shares, preferred shares will usually pay a higher dividend and will entitle shareholders to first right on the company’s assets in case of bankruptcies. Dividends are not only higher, but they are paid first (before common shares dividend). Preferred shares are halfway between common shares and bonds. Shareholders do not have voting rights. They are usually less volatile and less liquid (less stocks bought or sold each day) than common shares. If you start investing, you want to stick with common shares.

Symbol/Ticker

When you place a market order in your brokerage account, you will need the symbol or the ticker of the company. For example, Royal Bank’s ticker is RY. If a website covers both US and Canadian stocks, chances are “RY” will become “RY.TO” or “RY-TO” to identify on which market common shares can be purchased. You can search for the ticker inside your brokerage account or via a free investing site by looking for a “quote” or “stock quote”.

Quote/Stock Quote

In your broker screen, you will read “quote” or “stock quote”. This is where you will get the latest information on the stock you want to purchase. It will give you information such as the ticker, the full company’s name, the latest transaction price, the “bid and ask price” and “bid and ask size” and general information on the stock such as the PE ratio, the dividend yield, market capitalization, etc.

Bid and Ask Price

Remember the stock exchange (the Toronto Stocks Exchange (TSE) or the New-York Stock Exchange (NYSE), etc) is a place to buy or sell stocks. The bid price will refer to the latest order placed from a buyer (an investor is willing to pay $23.66 per company ABC shares) and the ask price refers to the latest order placed from a seller (an investor willing to sell shares of company ABC at $23.74). The transaction will happen once a buyer will meet a seller’s price.

If there is a huge difference between the bid and the ask price, this means there isn’t many buyers and sellers and the stock price will be subject to higher fluctuations. Penny stocks are a good example of this situation.

Bid and Ask Size

Similar to the bid and ask price, the size refers to the amount of shares an investor is willing to purchase or sell. This tells you how “liquid” the stock is. By liquid, I mean how many shares will be exchanged (bought and sold) in the upcoming transactions. The more liquid, the “smoother” the stock price will fluctuate. This is more important when you trade, again, penny stocks and other small capitalization (low value) stocks. Big guys of the TSX 60 don’t have this problem.

Market Order

A market order happens when you enter the number of shares you want to purchase, but you are willing to buy them at market price (the lowest ask price). That’s usually not a problem when there are lots of transaction (liquidity) going on because you will pay a price very close to the latest price shown in your stock quote.

Stop Order

The stop order is when you put a number of shares and a specific price you want to buy or sell. The transaction can be placed for several days until the desired price is reached. The transaction will only trigger if the price is reached.

Investors use that to buy stocks at a better price or to protect their gains. If a stock surged from $22.34 to $37.09, an investor may want to protect his profit by setting a stop sell at $35.00. If shares ever go down to this price, the online broker will automatically sell your shares starting at $35. This means that if shares keep going down, you will continue to sell until you have sold all your shares. Your average price sold will likely be lower than $35.

This doesn’t mean that you will sell the stock at $35/share, just that the market order will be triggered at $35. Same rationale applies for buy stop order.

Limit Order

A limit order is similar to a stop order only that the former will only happens at a specific price. For example, if you put a limit order to buy 400 shares at $56.75 and only 200 are available at that price, you will end-up with 200 shares in your account and a pending order for 200 more at $56.75.

Step #7 Where do you get your information to buy stocks?

Now that you are all set and ready to start investing, it’s time to do some stock research! Unfortunately for us, Canadians, the offer is quite limited when you look for free information on Canadians companies.

The best free stock screener you can find is probably over at the TMX or Yahoo Finance where you can do research on both Canadian and US stocks. This is a good place to start building your watch list.

Then, general sites such as Reuters, Motley Fool, , and Morningstar will provide you with some useful information and quick analysis.

Then, one of the best places to find reliable information is the company’s investor relations site. Simply type “Royal Bank investor relations” and you will get directly to where you can read quarterly reports, investors presentations and annual reports. I’ve listed other free financial resources here.

Step #8 Key metrics to find the best stocks to buy

What is the most important when I look at the company is not the number, but my investment thesis. Before I get there, I must screen stocks with a very specific, yet simple stock screener. I’m looking for company with revenue growth, earnings growth and dividend growth. This is what I call the “Dividend Triangle”.

Growing revenue

My criteria for a positive revenue analysis is:

  1. An increasing revenue trend line for at least the last 5 years;
  2. A revenue growth trend line that is steeper than the company’s closest competitor;
  3. Do I expect that the company has a better than reasonable chance of continuing with the steep revenue trend line in the next five years.

If the company cannot meet these requirements, then my analysis usually stops. However, there may be some cyclical stocks that see up and down periods in revenue growth. If this is a consistent pattern, then that is ok. Another thing I keep in mind is that very large companies (i.e. Royal Bank or Canadian National Railway) can have difficulty growing revenues year after year. I don’t necessarily look for a high revenue growth trend line, only a trend line that is up and growing faster than the competition.

Growing Earnings Per Share (EPS)

Earnings per share (EPS) is a much tougher thing to decipher for a company. Revenue is revenue and is hard for a company to lie about, other than recognizing sales before product actually ships or something like that. EPS on the other hand can be easily manipulated by a company, and not just in illegal ways. There are a number of very legitimate methods a company can present earnings. During my analysis of earnings, I don’t necessarily concern myself with the exact EPS number, but more importantly the trend line. Just as I do with revenue, I require the following criteria be met:

  • An increasing EPS trend line for at least the last 5 years;
  • An EPS trend line that is steeper than the company’s closest competitor;
  • Do I expect that the company has a better than reasonable chance of continuing with the steep EPS trend line in the next five years.

The last point can be tricky, but a further analysis of items such as ROE later on will help to determine how well management is performing in their ability to earn money for the company. I always keep in the back of mind that earnings can be manipulated. Again, I am looking at the trend.

The next step I take when analyzing EPS is to estimate what the EPS number will be 5 years out. This is obviously a very tricky thing to do, but it will be important later on when I start to value the stock. I look at the past 10 years of EPS history and earnings estimates from services such as Value Line to determine a number I am comfortable with. My approach is to be very conservative in my number to help build in a safety net if things get bad. This will ultimately give me a buy price for the stock that I believe has some safety built into it.

Dividend Growth

Once you’ve selected a company from your screener, the next step is to download their financial statements. If you are lucky, you will find an “Investor Fact Sheet” or “Recap” giving you some key ratios such as Earnings per Shares, Sales, Profit, and Dividend Payouts throughout the past years.

If you can’t get a hold of a one pager giving you the information right away, you’ll have to dig inside the financial statements. Take the annual reports as you will have more than one year and the info might have been calculated for you already.

When you look at the dividend growth history, it is preferable to look at the past five years. Instead of simply calculating the dividend growth annualized rate, I suggest you make a quick graph of the past 5 years dividend payout. It will give you a clear idea of which stocks have a strong dividend payout strategy compared to another. The graph can be as simple as the following:

Which looks a lot better than the following:

The first graph is a good indication of a solid company that is looking to increase its dividend year after year. For the record, the first graph is TRP dividend growth and the second graph is Encana dividend growth.

Looking at past dividend history is a good start to know if the company intends to boost its dividend in the future. But there is always a will and a way, right? So the company might have a strong dividend growth history over the past 5 years, it doesn’t mean that it is sustainable.

The relation between sales evolution and earning per shares will tell you 3 things:

  • How is the company’s main market doing (if sales are growing or not)
  • How are the company’s profits growing (are they making more profit or not)
  • How are the company’s margins doing (if the sales and EPS graph don’t head in the same direction, that’s a red flag or very nice news for the companies’ margin)

To ensure stable dividend growth over time, it’s obvious that you need stable sales and earnings growth. Sales growth will ensure future cash flow and earnings growth will ensure that the company makes more money as sales climb. If these two metrics are negative or growing erratically, you will need to dig deeper into the financial statements to explain it or simply pick another stock to analyze.

Royal Bank Example

Royal Bank is as close as a “perfect dividend triangle” you can find:

Source: Ycharts

In an ideal world, RY’s revenue and earnings would grow faster than its dividend, but you can see a steady trend for all three metrics. This is the kind of stock you want to buy for your retirement.

On the other side, if you look at a company such as Husky Energy (HSE.TO), you will notice how it could be difficult for the company to keep a strong dividend growth policy:

Source: Ycharts

This company business model is highly dependant on the oil market. Since 2014-2016 were terrible year in this sector, you can see the drop of revenue affecting earnings and, ultimately the dividend paid. Then, what happens to the stock price? It plummets and you wish you have never purchase this stock!

Source: Ycharts

There are many other metrics and steps to cover before making an investing decision. This will be covered in another article.

Step #9 Get your plan in motion; how to buy stocks summary

Before you start your investing journey and buy your first shares, remind yourself of the following key points:

#1 Keep things simple; overcomplicated will not necessarily improve your returns.

#2 Know yourself and know where you are going; having a financial plan and an investing strategy will come handy when the market goes crazy. Just stay focused on your plan when this happens.

#3 Write down why you buy stocks; elaborating your investment thesis for each purchase is crucial to build a solid portfolio.

#4 Don’t expect fast results; investing is all about playing the long game. After your purchase some shares, don’t refresh your account every hour. Don’t even look at it daily. Let time works is magic. Patient investors make good investors.

#5 Download this free ebook:

I wrote an entire guide on how to start investing in 30 days. This book will give you confidence and guide you through the first steps of your investing journey.

Transcontinental; Blueprint Transformation Toward Packaging

The Company in a Nutshell

  • TCL is the Canada’s largest printing company.
  • With the acquisition of Coveris Americas, TCL is moving toward the packaging business.
  • The company is now a leader in packaging and expect to develop new markets.

Business Model

Transcontinental Inc provides printing services in Canada and North America. The Company publishes consumer magazines and French-language educational, and community newspapers in Quebec and in the provinces of Atlantic. The largest printer in Canada, TCL is now moving its business toward packaging with the acquisition of Coveris Americas in 2018. The company operates 44 facilities employing more than 9,000 workers.

Source: TCL website

The company was evolving into a dying business (printing) and decided to proceed with a major transformation about a decade ago. The company now shows more than 50% of its revenue coming from packaging.

Source: Sep 2018 TCL presentation

Growth Vectors

Source: Ycharts

TCL hasn’t only diversified its business model in the past 10 years, it also found a way to generate more revenue. You can clearly see on the previous graph that it was about time. While revenues were on a down slope for several years, the acquisition of Coveris Americas is opening doors to new opportunities.

First, the company expects to generate economies of scale. Now that it operates an integrated platform with 21 new facilities, management plans on improving its margins as it integrates its new business.

Second, this transformational acquisition also leads to new markets for TCL. The company will now develop new market-ends such as agriculture, protein, beverages, performance packaging and advanced coating.

Finally, as the largest printer in Canada, TCL continues to optimize its printing business and generate consistent earnings. This is a continuous source of cash flow that will remain for several years. While revenue slowly decreases, TCL can use this extra cash flow to boost its packaging business.

Potential Risks

In a world where environmental values rise, we can wonder if it’s mandatory to print flyers and magazines.  For example, Montreal will debate if it’s going to allow the Publisac distribution going forward. While less people read printed publications, the environmental factor could hurt TCL business model faster than we can imagine. This is what often happens to consumer cyclical stocks; they either ride a wave or get swallowed by it. You can find better dividend paying consumer cyclical stocks here.

Source: Ycharts

TCL’s transformation toward a packaging business isn’t made without sacrifices either. The company saw its long-term debt surge by $1B following its acquisitions in 2018. The weight of this debt will not help TCL to remain competitive in a “hostile” environment where other US players may eye the company’s market shares in Canada.

TCL is at a cross-road and management must successfully integrate Coveris Americas. If new markets aren’t developed as expected, TCL will be left with not much growth vectors.

Dividend Growth Perspective

TCL has continuously increased its payout every year since 2002. In fact, TCL has been known for a shareholder friendly stock for a while now:

The company has been able to maintain a mid-single digit dividend growth rate while keeping its payout ratio well under control. Over the past 5 years, TCL showed an annualized growth rate of 5.59%.

Source: Ycharts

The price drop in 2018 led TCL to pay an interesting yield for income seeking investor. We expect TCL to continue increase its dividend by a mid-single digit growth rate going forward. With a payout ratio around 30%, there is plenty of room for TCL to increase its payments while continuing their business transformation.

TCL meets our  7 dividend growth investing principles.

Valuation

When you consider TCL major price drop from low $30’s to under $20, you may wonder if there is a deal here or if it’s a falling knife. Over the past 3 years, TCL valuation has been quite hectic going from a 5 PE ratio to as high as 12.50.

Source: Ycharts

For this reason, we rather use the dividend discount model to determine if there is an interesting entry point around $19. We used conservative dividend growth rates (5%) as we are a bit skeptical about the company’s growth vector. Since TCL contracted an important debt for its acquisitions, we used a discount rate of 10%.

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $0.84
Enter Expected Dividend Growth Rate Years 1-10: 5.00%
Enter Expected Terminal Dividend Growth Rate: 5.00%
Enter Discount Rate: 10.00%
Discount Rate (Horizontal)
Margin of Safety 9.00% 10.00% 11.00%
20% Premium $26.46 $21.17 $17.64
10% Premium $24.26 $19.40 $16.17
Intrinsic Value $22.05 $17.64 $14.70
10% Discount $19.85 $15.88 $13.23
20% Discount $17.64 $14.11 $11.76

Please read the Dividend Discount Model limitations to fully understand my calculations.

If you are expecting a 10% return on your investment, TCL price is still steep at $19. However, the company could turn things around fast if it successfully moves toward the packaging business.

Final Thoughts

TCL is the largest player in a mature (read slowly dying) industry; printing. As the world is going mobile, you can wonder who is reading printed copies these days. Fortunately for investors, management is well aware of the situation. This is why the company has performed a major transformation toward the flexible packaging industry. With the Coveris Americas transaction, TCL acquired of a strong expertise in technical film production that enabled insourcing of film manufacturing. This also helped to expand their portfolio and opened new markets. If management can achieve their transformation and generate economies of scale, TCL continues to please its shareholders with a ~4% yield.

 

If you made it this far, let’s be honest; you liked what you read. Now it’s time to make sure you don’t miss our next analysis and you subscribe to the Moose Newsletter by clicking on this link to make sure you don’t.

Disclaimer: We do not hold TCL.A.TO in our Dividend Stocks Rock portfolios.

Featured image source: Pixabay

Keyera – a Midstream in the Middle of a Big Problem

The Company in a Nutshell

  • The company spends around $1B yearly on its growth capital program.
  • KEY is a well-integrated energy company.
  • It’s heavy concentration in Alberta could be the smartest idea… or the worst.

In November 2018, Keyera missed earnings expectations with their latest quarterly report. The stock was already not doing so well, but now, it’s clearly diving down. While management tries to convince investors it will thrive in the future and reward them with juicy dividend hikes, do you think it’s the right time to invest in this midstream? Let’s take a look.

Keyera (KEY)

Source: Ycharts

Business Model

Founded in 1998, Keyera is among the largest independent midstream energy companies in Canada. It is engaged in gathering, processing, and fractionation of natural gas in western Canada; storage and transportation of crude oil and natural gas by products; and marketing of natural gas liquids. Through its business integration, KEY benefits from diversified sources of income coming from “gathering & processing”, “liquids infrastructure” and “marketing” segment.

Keyera (KEY)

Source: KEY investor presentation

As you can see, the company’s infrastructure is mostly based in Alberta. The company has enjoyed strong growth in the past, but Alberta oil sands exploitation is not that obvious anymore.

Growth Vectors

Keyera’s business model is all around oilsands and natural gas. The company has made a great job in integrating all aspect of its business to make sure it generates great margins at each step.

Keyera (KEY)

Source: KEY investor presentation

As long as there will be demand for oil sands and raw gas, Keyera will definitely surf this tailwind. Management has spent about $1B in growth project in 2018 and expect to spend about the same amount ($800M to $900M) in 2019. This should ensure strong production capacity for the years to come.

Potential Risks

Keyera doesn’t enjoy the stability of major pipelines as most of its contract is not signed for 20-25 years. Therefore, a rapid shift in the industry could affect their business model. Demand could drop and Keyera would be left with large (and costly) infrastructures not doing much. KEY could definitely suffer from overcapacity in the future.

KEY’s activities are highly concentrated around one region. If there is a shortfall in production in Alberta, KEY will pay the price of this concentration. Regulations may slow down future project as environmental concerns rise. Oil sands isn’t the cleanest energy source around, right?

Finally, KEY’s keep increasing its debt year after year for the past decade. We understand KEY needs to invest to ensure growth. However, it’s always easier raising debt when the market has a strong appetite and interest rates are low. The game rules could change in the upcoming years.

Keyera (KEY)

Source: Ycharts

Dividend Growth Perspective

With a 5%+ yield and a monthly distribution, Keyera has been on many dividend investors’ Christmas gifts list. Management has made sure to transform KEY into a shareholder friendly stock. However, its price evolution isn’t exactly going toward the same direction compared to its dividend.

Keyera (KEY)

Source: Ycharts

The market is concerned about production slowdown, its higher debt level and its ability to generate additional cash flow during a downturn. While KEY maintains a distributable cash flow payout ratio around 60-70%, we all know this could change quickly in this sector.

Keyera (KEY)

Source: KEY investor presentation

KEY’s dividend is safe and management expects to increase it by 5%/year for the next 5 years. Will they achieve this great goal? We are not 100% sure. For now, KEY meets our  7 dividend growth investing principles.  However, the situation could turn around quickly.

Valuation

After such debacle on the stock market, you may think there is a great deal waiting for you. Let’s take a look at how KEY has been valued by investors over the past 10 years:

Keyera (KEY)

Source: Ycharts

As you can see, KEY has usually been trading over a 20 PE ratio for several years. The recent PE drop could be linked to either a great opportunity or the meaning that the golden era is over.

Management intends to increase its payout by 8% over the next 5 years. We rather use more conservative numbers for our dividend discount model. We then used a 4% long term dividend growth rate and the average between the 8% KEY forecast and our 4% expectations for the first 10 years:

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $1.80
Enter Expected Dividend Growth Rate Years 1-10: 6.00%
Enter Expected Terminal Dividend Growth Rate: 4.00%
Enter Discount Rate: 10.00%
Discount Rate (Horizontal)
Margin of Safety 9.00% 10.00% 11.00%
20% Premium $52.57 $43.57 $37.15
10% Premium $48.19 $39.94 $34.06
Intrinsic Value $43.81 $36.31 $30.96
10% Discount $39.43 $32.68 $27.86
20% Discount $35.05 $29.05 $24.77

Please read the Dividend Discount Model limitations to fully understand my calculations.

Then again, there seems to have an interesting opportunity right now.

Final Thoughts

As one of the largest midstream companies in Canada, Keyera enjoys the economy of scale. The company generates profit from processing, storing, transporting and marketing crude oil and natural gas. If you are looking at a strong play on the Alberta oil sands, Keyera may be a good candidate. However, the company will live or die by the sword as such concentration could result in catastrophic outcomes in the event of a bear market. Since 2014, shares are on a downtrend. While management invests about $1B in growth projects per year (2018 and 2019), we also see debt rising. KEY’s long-term debt has doubled between 2013 and 2018 (from $1.077B to $2.252B). Proceed with caution.

If you made it this far, let’s be honest; you liked what you read. Now it’s time to make sure you don’t miss our next analysis and you subscribe to the Moose Newsletter by clicking on this link to make sure you don’t.

Disclaimer: We are long XYZ in our Dividend Stocks Rock portfolios.

 

Featured image source: Keyera Website

 

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