I’ve held off on keeping up with much financial news lately, or reading any blog entries, because the pace of change is ridiculously fast right now. A few weeks ago, the markets were in a yo-yo formation, swinging from positive to negative territory, practically on a daily basis. If we use VCN.TO (Vanguard FTSE Canada All Cap Index ETF) as a proxy, we can see what I mean:
When the market first tanked, I jumped on the opportunity. Luckily I had a fair amount of excess capital saved away, and I was able to splurge on some fun stocks where I wasn’t too sure where things would go (namely SPCE.N, Virgin Galactic), pick up some stocks I had my eyes on (e.g. CTC-A.TO, Canadian Tire), and double down on some other investments (e.g. WEN.N, Wendy’s). All things considered, given a 20+ year timeframe all of these investments should yield some great results over time. I was able to pick up SPCE.N near my target of U$20/share (even though it has dropped to the mid-teens since then; it was in line with my willingness-to-pay), cut my ACB for WEN.N in more than half, and finally picked up a strong Canadian dividend player on the cheap. But I made all of those purchases near the beginning of the chaos that snagged the markets, and as things got worse and worse, I pulled myself over to the sidelines until things calmed down a bit.
The COVID-19 epidemic has been going on for a few weeks now, and for the most part I feel that the economy, while it is still in horrible condition, has adapted to what is happening. Businesses that would be forced to close have done so. Businesses that have been deemed essential, have been told so (and have remained open). Society is slowly adjusting to the new (temporary) norm of staying indoors and avoiding all social contact whenever possible to help curb the spread of the virus. So, now that things are settling down, it makes sense to take stock—no pun intended—of our investments and see where things sit.
As a dividend investor with a short-term plan to FIRE by 2026, I break my investments down into two broad categories: tax free in my TFSA) and taxable in my regular margin account. With the dust settling I finally had time to sit down and take a hard look at where things sit as of today (April 12, 2020). The results aren’t as bad as I thought they would be.
|Tax Type||Ticker||YoY Change %||Weight for Tax Type||Weight for Total|
Table – Weights of Dividend Income
(Side note: CTC-A.TO excluded since positions are as of February 29, 2020).
My tax-free account is composed of regular equity positions, with VRE.TO and XBB.TO thrown in to give me some real estate and fixed income exposure. My taxable income is primarily DRIPs at various brokerage houses. At first blush some of the numbers are rather…staggering.
- NA.TO, HR-UN.TO, REI-UN.TO, all have YoY changes in excess of 200%. This is mainly a reporting issue, since the reporting for those positions was not captured accurately in 2019; but the 2020 income is accurate.
- BCE.TO and NA.TO show 4-digit percent increases; this is due to my buying some shares directly through the brokerage at the tale end of 2019, which increased my holdings by large amounts, resulting in a huge increase in dividend income.
With the outliers out of the way, that leaves the other two drops:
- High Liner Foods (HLF.TO) cut their dividend last year by more than 50%, so the reduction in income was expected.
- CAE Inc. (CAE.TO) announced measures to protect its financial position, and one of those measures was to cut its dividend indefinitely.
The above changes aren’t too concerning: HLF.TO was expected (in fact, when the price dropped I picked up more shares in High Liner; I am confident in the company’s overall operations, and see this as a buying opportunity), and CAE.TO accounted for less than 1% of overall dividend income (and less than 3% of taxable income).
All things considered, I got off lucky. Because HLF.TO and CAE.TO accounted for small parts of my portfolio, natural dividend gains for other companies made up the difference. But in retrospect my portfolio is very concentrated in a few positions; except for XBB.TO and HLF.TO, all of my positions in the tax-free account exceed 5% of the total income. Put another way: it takes as little as two companies to cut or reduce their dividend for my income to potentially be cut by at least 10%. In fact, if real estate tanks (I am not clear if that will be the case or not), I may be in some serious trouble since Vanguard’s FTSE Canadian Capped REIT Index ETF (VRE.TO) accounts for more than a quarter of my dividend income.
The takeaway here is that I have to take a better look at diversification in my portfolio. One tactic I am contemplating is restricting dividend income to 5% for any one position. However, that implies expanding my holdings to at least 20 different companies/ETFs. There are several great dividend companies out there, so I am not concerned about finding good investments. The broader complication is that I have already maxed out my TFSA contributions for the year, so the only way to re-balance would be to sell existing positions. However, I’m unwilling to sell right now because (a) the market is still low; and (b) other than the relative weighting of income, there is nothing wrong with the companies I currently hold (i.e. no need to sell).
What does all of this mean in the context of the broader COVID-19 crisis?
So far, nothing. The crisis and its impact on the overall economy has forced me to take a closer look at my portfolio as a whole and rethink my capital allocation and risk mitigation strategies, but insofar as individual companies are concerned, I am not too concerned, yet. However, as it stands the social distancing strategy may go on until the summer according to reports from Global TV and The National Post, so it is really anybody’s guess which direction this will go. I have observed that slowly people are becoming used to the new norm, e.g. take-out only, grocery delivery, not leaving home unless necessary, etc. Efforts by the government to help out individuals in financial need, and businesses in financial need, are kicking off. With assisting the economy, hopefully consumer spending will start to level out to a new norm (although I doubt that we will reach pre-COVID-19 norms anytime soon). Businesses that I myself frequent, such as Home Depot, Best Buy, Canadian Tire, Swiss Chalet, Wendy’s, etc. are all doing curb-side pick-up and take-out, and adjusting to the new method of servicing customers.
In the meantime, I will be monitoring the news more closely and looking for other investment opportunities as they arise.
Onwards and upwards (well, at least onwards!).
It has been over 3 years since I last reviewed High Liner Foods Ltd. To date, HLF.TO is still one of my favourite companies as it was as the first that I truly analyzed, and over the years it has been an impressive performer in my portfolio. At a high level, High Liner Foods is a supplier of quality seafood dishes and supplies to both the retail and commercial markets, here and in the US. They have operations throughout North America, and have grown over the years both organically and through acquisitions. Their own corporate snapshot best summarizes the firm:
High Liner Foods is the leading North American processor and marketer of value-added frozen seafood. High Liner Foods’ retail branded products are sold throughout the United States, Canada and Mexico under the High Liner, Fisher Boy, Mirabel, Sea Cuisine and C. Wirthy & Co. labels, and are available in most grocery and club stores. The Company also sells branded products under the High Liner, Icelandic Seafood and FPI labels to restaurants and institutions and is a major supplier of private label value-added frozen seafood products to North American food retailers and foodservice distributors. High Liner Foods is a publicly traded Canadian company, trading under the symbol HLF on the Toronto Stock Exchange.
Source: 2015 Annual Report
From an analysis standpoint, HLF is an interesting company. The company is headquartered in the maritime provinces, and pays and reports its dividend in Canadian Dollars, but since 2012 they have reported their financial statements in US Dollars. This requires us to make some minute adjustments to EPS and Cash Flow per Share calculations, to ensure we factor in the appropriate exchange rate. Moreover, this can swing the YoY growth metrics, since a shift in the USDCAD exchange rate can have a drastic effect on their bottom line due to foreign exchange gains or losses.
Below are the key evaluation criteria for HLF:
|Strong financial condition||Current Ratio||2.30||1.50||YES|
|Earnings Stability||Number of most recent years of positive EPS||9.00||3.00||YES|
|Earnings Stability||Number of consecutive years of negative EPS||1.00||1.00||YES|
|Dividend Growth||Compound Annual Dividend Growth||0.21||0.02||YES|
|Share Price Growth||Compound Annual Share Price Growth||0.12||0.03||YES|
|EPS Growth||Compound Annual EPS Growth||0.23||0.03||YES|
|Moderate P/E Ratio||P/E||16.20||15.00||NO|
|Moderate P/BV Ratio||P/BV||2.39||1.50|
|Moderate P/E*P/BV Ratio||P/E * P/BV||38.72||22.50|
And here is some of the fundamental data underlying the above evaluation criteria:
|Year||EPS||Dividend per Share||Dividend Payout Ratio (EPS)||Dividend Payout Ratio (FCFS)||ROE||P/E Ratio||Book Value||Price to Book Value (P/BV)||Net Income (000s)||P/E × P/BV|
HLF’s share price was on a bit of a tear up until 2014, and it has been dropping since then. I don’t necessarily see this as a bad thing – in 2014, they were trading at more than 3.5× book value, so a pull back from that price provides more buying opportunities. Another important point is that in December 2013 HLF was added to the S&P Canadian Dividend Aristocrats Index. The addition to this index would theoretically increase trading volume as the any ETFs based on the index would be buying and selling shares of the underlying companies, HLF being one of them. This addition was short lived how however: it was removed in February 2015 because it did not meet the average daily value traded criteria1.
As a long term investor who is more interested in the continuous passive income from holding the company in my portfolio, rising or falling share prices do not necessarily spook me. Falling share prices are a good thing, since they give me more opportunities to add to my portfolio, provided the underlying fundamentals remain strong. That said, I am more interested in the company’s dividend, its dividend growth, and the margin of safety for the dividend vis-à-vis the ability of the firm to consistently pay that dividend.
2012 is one year that stands out when examining the historic fundamentals for HLF. Their EPS over 2011/2012/2013 went—on a split and currency adjusted basis—from $1.20 in 2011, to $0.14 in 2012, and back up to $1.10 in 2013. The main reason for this was due to one time write-down charges due to some of their acquisitions in 2011 and 2012, which reduced their net income from $18,180,000 in 2011 to $2,203,000 in 2012. This one time charge drastically reduced EPS, and helps to explain the huge spoke in the P/BV × P/E value for the same time period, illustrated in this graph:
Notice how in 2012 the P/E × P/BV spiked at almost 700, but then dropped down to ~350 in 2013, before returning back to more realistic levels in 2014 and 2015 of 69.7 and 28.0 respectively. All that aside, if we were to naively look only at the dividend payout ratio relative to EPS we would be very worried; dividend as a percentage of EPS was 289.7% in 2012! However, if we inspect dividend payout ratio to the free cash flow per share (green line in the Dividend Payout Ratio (vs FCF) graph), we see that the dividend has consistently been below 21.1% since 2006 (it was marginally higher at 30.3% in 2005). Moreover, notwithstanding the drop in 2012, the EPS on a year over year basis has been generally trending upwards; 2012 was the exception, not the norm.
Over a 10 year time horizon, HLF has had positive dividend growth, EPS growth, and share price growth, with compounded annual growth rates of 15.0%, 27.1%, and 11.8% respectively. Even taking into account the pull-backs since 2013 in the share price, and the EPS drop in 2012, the stock over a longer time horizon (e.g. 10 years) has been very strong. My recommendation criteria would place HLF as a HOLD, primarily because the P/E × P/BV multiplier is very high at 28.0, which is higher than our threshold of 22.5. However, given the relative strength of the dividend, and HLF’s impressive 15.0% compound annual dividend growth over the past 10 years, I would consider purchasing it even today, unless there were more suitable companies to buy on the open market. Either way, I would purchase on dips: purchasing at any price strictly than $13.95 on the open market would push us below the magic 22.5 threshold for P/E × P/BV, based on the F2015 EPS and Book Value.
1. As per an email exchange with S&P Dow Jones Indices. Email me for more information or for a copy of the exchange.
High Liner Foods holds a special place in my investing heart, because it was the first stock that I ever performed my own analysis on. Since purchasing it in 2010, it has soared over 50%, making it an incredibly valuable part of my portfolio. High Liner’s success is what really pushed me into the value investing sector, whereas before I was always trying to time the markets as a day/swing trader. High Liner’s share price growth has been impressive, showing an 8.57% compound annual rate of return from 2002-2011.
Fast forward two years, and things are even better. On September 20, 2012, High Liner Foods announced that they had been added to the S&P/TSX Small Cap Index, which was a major accomplishment. This addition brought about added exposure and liquidity to the stock as it is now traded in some of the S&P/TSX Small Cap ETFs such as iShares XCS.
Given all of these changes, I felt that High Liner warranted a refresh of my initial analysis. While I discussed my initial evaluation methodology previously, reviewing my original analysis reminded me of some of the fundamentals I should be looking for. That said, I’ll be expanding my initial evaluation methodology, starting with High liner. So, what do we have at first glance?
|Strong financial condition||Current Ratio||2.05||1.50||YES|
|Earnings Stability||Positive EPS over last 3 years||8.00||3.00||YES|
|Earnings Stability||Less than 2 consecutive negative years||0||2||YES|
|Dividend Growth||Dividend Growth||30.75%
|Share Price Growth||Minimum 3.00% compound growth over the past 10 years||9.82%||3.00%||YES|
|Moderate P/E Ratio||P/E||8.61||15.00||YES|
|Moderate P/BV Ratio||P/BV||1.09||1.50|
|Moderate P/E*P/BV Ratio||P/E * P/BV||9.38||22.50|
In the above, the one that needs a real explanation is the P/E, P/BV, and P/E×P/BV section. I consider a firm to be overpriced if its P/E is greater than 15, its P/BV is greater than 1.5, or if the combined value of both is greater than 22.5. This combination factor allows for some flexibility.
If the above looks familiar, it probably is. For the most part, this is a screen taken from Benjamin Graham’s The Intelligent Investor. The above values are based on the 2009 fiscal year, which is the data I originally used for selecting the stock. However, looking at 2011 data, we have a drastically different story:
|Strong financial condition||Current Ratio||1.31||1.50||NO|
|Earnings Stability||Positive EPS over last 3 years||10.00||3.00||YES|
|Earnings Stability||Less than 2 consecutive negative years||0||2||YES|
|Dividend Growth||Dividend Growth||28.03||2.00%||YES|
|Share Price Growth||Minimum 3.00% compound growth over the past 10 years||5.37%||3.00%||YES|
|Moderate P/E Ratio||P/E||13.59||15.00||YES|
|Moderate P/BV Ratio||P/BV||1.53||1.50|
|Moderate P/E*P/BV Ratio||P/E * P/BV||20.78||22.50|
While all of the initial tests passed, the price of HLF.TO is now incredibly high; the 2011 chart is based off of a $16.35 share price, but the stock is now trading at $23.94, which yields a P/E of 19.90, P/BV of 2.24, and P/E×P/BV of 44.55! (This is assuming we use the EPS of the fiscal year, with the October 1, 2012 share price). The stock would definitely not be on my radar at the moment because it is incredibly overpriced.
Initial screen aside, the other fundamentals look solid.
Observing the above, there has been consistent growth in the dividend over the past five years, and the dividend payout ratio has — except for 2005 — remained consistently below 50%. In adition to this, EPS has been inching slowly upwards since 2005. One may be a little wary of the huge EPS in 2003 which suddenly dropped by 2004, but the 2003 blip was a one time event “realized on [High Liner’s] exit from the harvesting and primary processing businesses,” as discussed in the 2003 annual statement.
While FCF has been a little week, overall High Liner has been a solid performer. Good management has seen the company shedding businesses that it no longer needs (such as food processing in 2003 and the Italian Village line in 2005), and making good acquisitions such as their purchase of Icelandic Group in 2011. All in all, the firm has strong fundamentals, a good management team which is focused on increasing the value of the business, and a solid (but well managed) history of increasing dividends.
Depending on what the fiscal 2012 results are, I would consider picking up HLF.TO on dips in 2013, provided the combined P/E×P/BV ratio was less than 25 (higher than my regular threshold, but I woudl be willing to give a little on an excellent company).