Seeking Alpha

3 Canadian Dividend All-Stars

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Includes: BNS, FTS, TD
by: Dividend Sleuth
Dividend Sleuth
Long only, value, growth at reasonable price, dividend income
Summary

Three Canadian Dividend All-Stars were added to the portfolio this week.

Toronto-Dominion Bank.

Bank of Nova Scotia.

Fortis Inc.

Three All-Stars were added to the portfolio this week: Two former holdings and one newcomer

A final pension rollover occurred this week, which brought some fresh money for my IRA. I re-established positions in two former holdings:

  • Toronto-Dominion Bank (TD); and
  • Bank of Nova Scotia (BNS).

I added a newcomer: a Canadian utility that has raised its dividend for 44 consecutive years: Fortis, Inc (FTS).

Most dividend investors at Seeking Alpha are familiar with the list of Dividend Champions that was begun by David Fish and now maintained by Justin Law. Champions have raised their dividend for 25+ consecutive years, Contenders for 10+ years and Challengers for 5+ years. This list is made available through the DRIP Investing Resource Center.

Canada has a lesser known group of dividend growth companies known as the Canadian Dividend All-Stars. These companies have raised their dividend for at least 5 consecutive years. The DRIP Investing Resource Center provides a link to the Dividend Growth Investing & Retirement website, which maintains the All-Star list.

The three Canadian companies added this week are on that list. Two of the companies are former bank holdings, TD and BNS, and Fortis, a well-known diversified Canadian utility that was new to me. I hold these shares in an IRA which, by treaty, dividends exempt from Canadian withholding taxes.

Toronto-Dominion Bank

TD was added on July 31 at $59.13. It is 1.09% of the portfolio, which compares with Royal Bank of Canada (RY), which is 2.30% of the portfolio. Since March, 2007, Standard & Poor's has maintained a credit rating of AA- on TD. The outlook is stable. TD has increased its dividend for 7 consecutive years. TD's 5-year dividend growth rate has been 10.2%, and when added to the current yield, the total dividend return (or "Chowder Rule" number) for TD is 13.7.

TD Bank is headquartered in Toronto, but it is one of the 10 largest banks in the U.S. It advertises itself as "America's Most Convenient Bank." As of April 30, 2018, TD had total assets of $1,283.8 billion CAD and total deposits of $829.8 billion CAD. Market capitalization is $133.0 billion. TD has 83,000 employees and 2,365 retail locations. Here's a breakdown of TD revenues from the company website:

In July, 2016, I initiated an earlier position in TD at $43.23, and closed the position at $58.80 in February, 2018. I've kept TD on my watchlist. On a price/earnings basis, TD appears to be a relatively good value compared with many U.S. companies. In May, TD reported Q2 earnings per share of $1.54 CAD, up from $1.31 CAD for Q2 2017. The trailing 12-month EPS is $5.71 CAD. I update a cell on my spreadsheet with the CAD/USD exchange rate. Currently $1 USD = .7691 CAD. The rate changes daily. My spreadsheet automatically converts the CAD EPS of $5.71 to $4.39 USD.

The currency conversion is not time consuming, particularly with today's computer capability. However, a word of warning is in order. Financial reporting services are not always clear about whether they are providing CAD or USD information. Even worse, sometimes they "mix and match." Better Investing makes Morningstar data available to its members. Their report gives quarterly EPS data in Canadian dollars. (I checked this against the TD press releases, which report in CAD.) However, the report shows the current price/earnings ratio as 10.5. This is not accurate. The report divides the CAD earnings by USD priced shares. My spreadsheet automatically translates the earnings, which are reported in CAD. The current P/E ratio is actually 13.5.

Seeking Alpha also has some conflicting data. SA's page for Toronto-Dominion correctly translates earnings into U.S. dollars, showing the correct P/E ratio of 13.38. But, just above that information, SA shows a 52-week price range for TD of $49.91 to $75.46. A close look at the accompanying 1-year graph shows that the 52-week low was, indeed, $49.91. However, the graph indicates that the high price is just about $61. A quick check with CNBC's app shows the 52-week price range (in USD) for TD to be $49.91 to $61.06. Somewhere during my deliberative process, I glanced at SA's version of the 52-week price range. When I saw $75.46, I thought, "TD's price has really dropped." I should have double-checked the figures. I laughed and said, "The joke's on me!" SA's mistake wasn't a factor for me because I was more focused on TD's relatively low P/E ratio of 13.5. When studying a Canadian company, be sure you know whether the data is being reported in Canadian dollars or U.S. dollars. I had erroneously entered $75.46 as the 52-week high on my spreadsheet, which promptly calculated that the present price was 21% below the high. After I made the correction on my spreadsheet, it shows that the present price for TD is just 3% below the 52-week high. (I don't mean to belabor this point--but I want you to see how easy it is to make a mistake when dealing with currency translation and imperfect data sources.)

My spreadsheet translates the quarterly dividend (paid in Canadian dollars) to U.S. dollars. TD's quarterly dividend is $.67 CAD. My spreadsheet multiplies it by the current exchange rate (now .7691), so that the quarterly dividend appears on the spreadsheet as $.52 (rounded up from $.5154) USD. This means the annual dividend of $2.68 CAD is $2.06 (rounded down from $2.0617 USD, reflecting the current exchange rate. At Friday's closing price of $59.23 USD, the yield is 3.48%.

With Canadian companies, I tend to rely more on the company websites, press releases and quarterly/annual reports, just to be sure I'm dealing with Canadian dollars. Toronto-Dominion's Q2 press release indicates that TD's Canadian retail banking income was up 17% over Q2 2017 and their U.S. retail banking income was up 16% over Q2 2017. TD is making good headway in their U.S operations. (U.S. retail numbers do not include TD Ameritrade, which is reported in another segment).

(Graph from F.A.S.T. Graphs)

The F.A.S.T. Graph for TD (above) shows diluted earnings (GAAP). Each quarter TD reports diluted earnings and adjusted earnings. F.A.S.T. Graphs has translated the Canadian dollars into U.S. dollars, which makes it easier for U.S. investors. But even here, F.A.S.T. Graphs picked up the 52-week high price in Canadian dollars rather than U.S. dollars. The good news (for a buyer) is that the general trend line is moving up and the share price continues to reflect good value.

Here is a paragraph from Jonathan Wheeler's June 12 paywalled article, TD Bank: Best in Class:

"TD is still primarily a Canadian bank, but a large portion of its income comes from the US, and its 41% stake in TD Ameritrade (AMTD) is likely to continue paying dividends for the company as it expands with the recent Scottrade acquisition. A key point to keep in mind about the Canadian banks is that their profitability tends to go down somewhat as the banks expand (with the notable exception of Bank of Nova Scotia. Higher competition and less regulation in other markets tend to compress margins, which has led the overwhelmingly Canadian-centric CIBC to maintain the highest profitability ratios up until its recent acquisition. That being said, TD is likely the leader of the pack when it comes to strictly retail banking, and the metrics speak for themselves when compared to peers."

In a July 10 press release, TD announced that it is purchasing Saskatchewan-based Greystone Managed Investments Inc. for $792 million CAD. The bank stated:

"With this transaction, TD will add Greystone's $36 billion in assets under management to their existing $357 billion under management, bringing the pro forma total to approximately $393 billion assets under management at TD."https://www.finviz.com/quote.ashx?t=TD

Finviz shows the previous 5-year earnings per share growth for TD has been 10.30% and the projected growth for the next 5 years is 8.65%. My spreadsheet shows a dividend to earnings payout ratio of 47%.

Simply Safe Dividends gives TD a Dividend Safety Score of 92, meaning that the dividend is safer than 92% of the companies in the SSD universe.

Now that I'm moving more fully into retirement and at the point where the accumulation phase of life is about to be replaced with the distribution phase, I'm more interested in companies with steady, relatively safe growth. I plan to hold TD as long as the story stays positive.

My target price for adding more shares of TD is $55.72 USD, which would represent a 3.7% yield at the current dividend and currency exchange rate. I've set an alert with Custom Stock Alerts to be notified when TD reaches that price. I would like to raise the TD portfolio percentage to 2%, roughly the level of RY.

Bank of Nova Scotia

BNS was added on July 31 at $59.29. It is 1.09% of the portfolio. Since December, 2012, S&P has given BNS a credit rating of A+, with a stable outlook. At A+, BNS is one notch below the AA- rating for both RY and TD. Like both RY and TD, BNS has raised its dividend for 7 consecutive years. The 5-year dividend growth rate for BNS has been 6.8%, and when added to the current yield, the total dividend return (or "Chowder Rule" number) for BNS is 11.1.

The "Big 5" Canadian banks, including Bank of Montreal (BMO) and Canadian Imperial Bank of Commerce (CM), are strong and strongly competitive. Both BMO and CM have S&P credit ratings of A+. CM has raised its dividend 7 consecutive years and BMO has raised its dividend 6 consecutive years.

BNS was my first Canadian bank, purchased at $48.09 in February, 2008 after reading a Forbes article. In preparation for this article, I found my index card for this original purchase. In August, 2011, I wrote this note at the bottom of the card:

"Multiple recommendations, beginning with Forbes. Only bank stock I kept after the '08-'09 recession. Canadian banks conservatively managed. Scotiabank is strong in Latin America. Consider adding more @ $44.00."

The "Latin America" reference was written shortly after a visit to Costa Rica in 2011, where it was obvious that Scotiabank is a major player in that region. In August, 2011, I closed the BNS position at $52.28 and used the proceeds to buy additional shares of Genuine Parts (GPC) at $50.15, Eaton (ETN) at $40.23 and Paychex (PAYX) at $26.23.

The Bank of Nova Scotia was founded in 1832 in Halifax, Nova Scotia. The bank moved its headquarters to Toronto in 1900.

This is the first time I've owned 3 Canadian banks simultaneously. Why do this? My friend Robert Allan Schwartz holds all 5 Canadian banks in his 14-stock retirement income portfolio.

The aforementioned TD acquisition of Greystone is part of a larger movement toward consolidation in Canada's financial industry. A National Post article about the Greystone deal said this:

"The asset management sector in Canada is in a consolidation phase with privately held firms being snapped up amid heightened competition.

"In March, the Bank of Nova Scotia announced a $950-million deal to buy Montreal’s Jarislowsky Fraser investment firm to create the third-largest active money manager in Canada."

As of April 30, 2018, BNS had total assets of $926.3 billion CAD and total deposits of $640.6 billion CAD. Market capitalization was $94.6 billion CAD. BNS has 89,800 employees and 2,983 branches and offices.

The BNS website is helpful and user friendly. It includes a Q2 Investor Presentation, which has the following map:

North American investors who have travelled to parts of Latin America will not be surprised that BNS is the largest bank in the Caribbean region. The "Pacific Alliance" (Mexico, Peru, Chile and Colombia) accounts for 65% of their international banking earnings. Also from the Q2 Investor Presentation:

On May 31, BNS announced an agreement to acquire MD Financial Management and an "Affinity Agreement" with the Canadian Medical Association. This brings an additional $49 billion CAD under management. The cost is $2.585 billion CAD, which will be partially paid for with the proceeds of 19.7 million common shares at $76.15 CAD ($58.58 USD at the current exchange rate).

(Graph from F.A.S.T. Graphs)

F.A.S.T. Graph reports earnings, dividends and share price data in U.S. dollars. The 52-week price range for BNS has been $55.85-$66.78 USD. The current price of $59.26 USD is 11% off the 52-week high price.

My spreadsheet calculates the current price/earnings ratio for BNS to be 11.2. It shows a dividend to earnings payout ratio of 48%.

Finviz indicates that the previous 5-year earnings per share growth for BNS has been 4.60% and the projected growth for the next 5 years is 5.43%. This is considerably lower than TD, but it is partially offset by a higher yield.

Simply Safe Dividends gives BNS a Dividend Safety Score of 88.

My target price for adding more shares of BNS is $56.07 USD, which would represent a 4.5% yield at the current dividend and currency exchange rate.

Fortis

Fortis Inc. was added on July 31 at $32.72. It is 0.97% of the portfolio. The FTS website leads with the announcement that "Fortis is one of the top 15 utilities in North America," with 10 utility operations in Canada, the United States and the Caribbean. FTS has 2.0 million electric customers, 1.3 million gas customers and 8,500 employees. Since June, 2007, Fortis has had a S&P credit rating of A-. On March 21, 2018, S&P gave FTS a negative outlook, stating:

"The outlook revision reflects our view of a modest weakening to Fortis' financial measures following the U.S. corporate tax reform, which will reduce utility rates and cash flow at its U.S. subsidiaries."

Fortis, based in St. John's, Newfoundland, has raised its dividend for 44 consecutive years, placing it second in tenure among the Canadian Dividend All-Stars, behind only Canadian Utilities Ltd (OTCPK:CDUAF) at 46 years. The 5-year dividend growth rate for FTS has been 6.3%, and when added to the current yield, the total dividend return (or "Chowder Rule" number) for FTS is 10.3. FTS targets 6% average annual dividend growth through 2022. Their website home page states:

"We have grown from just $390 million CAD in assets when we were formed in 1987 to $50 billion today. Fortis continues to power ahead as we seek additional opportunities to diversify our asset base and grow our company both within our existing franchise territories and beyond."

In a July 24 article about Canadian Utilities, I mentioned that my introduction to CDUAF came as a by-product of studying Fortis. I first learned of Fortis through a May 9, 2016 article (now paywalled) by John Lawlor: Fortis Inc.: Buy The Stock Now. Put It On The Shelf. Sleep At Night.

John says Fortis is attractive because its "solid, long-term visible growth...is driven by a diversified, regulated utility asset base":

"Substantially all of Fortis' assets are low-risk, regulated utilities and long-term contracted energy infrastructure. No single regulatory jurisdiction comprises more than one-third of total assets. As a regulated utility, Fortis delivers safe and stable income. Almost 100% of Fortis' 2016 earnings will come from regulated or long-term contracted utility operations - principally electricity and natural gas transmission and distribution - that are insulated from commodity prices, throw off stable cash flows and account for most of the company's growth."

John mentioned four key acquisitions that transformed Fortis, which are highlighted in the linked references:

  • In 2013, CH Energy Group was acquired for $1.5 billion USD. Its primary business is Central Hudson, which serves 300,000 electric customers and 79,000 natural gas customers in New York State.
  • In 2014, UNS Energy was acquired for $4.5 billion USD. It serves 663,000 electricity and gas customers from its base in Tucson, Arizona.
  • In 2015, for $266 million USD, Fortis bought Chevron Canada's stake in the Aitken Creek Gas Storage Facility in British Columbia.
  • The most transformative acquisition was the 2016 purchase of ITC Holdings for $11.3 billion USD. Fortis funded the purchase through the issuance of equity and debt. In addition, the Singapore sovereign wealth fund GIC took a 19.9% stake in the assets of the former ITC.

The ITC acquisition brought to Fortis 15,600 miles of transmission lines in Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma, with a peak load capability of over 26,000 megawatts.

Here are the ten utility operations of Fortis:

Regulated Canadian:

Regulated Caribbean:

Regulated U.S. electric and gas:

Regulated independent transmission:

Other energy infrastructure includes Waneta and BECOL hydroelectric generation and the Aitken Creek storage facility in British Columbia.

(Graph from F.A.S.T. Graphs)

The current Fortis quarterly dividend is $0.425 CAD, or $1.70 CAD annually. At the current exchange rate, the dividend is $.327 USD, or $1.308 USD annually. The current yield is 3.96%.

The 52-week price range for FTS has been $30.88-$38.24 USD. The current price of $33.05 USD is 14% off the 52-week high price.

Simply Safe Dividends gives FTS a Dividend Safety Score of 73.

My spreadsheet calculates the current price/earnings ratio for FTS to be 18.5. It shows a dividend to earnings payout ratio of 73%. The P/E ratio and the payout ratio were impacted by a non-cash charge against earnings in Q4 2017. GAAP earnings for that quarter were $.32 CAD and adjusted earnings were $.62. Using adjusted EPS for that quarter lowers the P/E ratio to 16.4 and it lowers the payout ratio to 65%. The non-cash charge was due to the U.S. tax reform legislation. Here's management's comment from the Q4 2017 earnings release:

"Partially offsetting the above earnings growth was a non-cash write down of $146 million as a result of remeasuring deferred income tax assets and liabilities related to the enactment of the Tax Cuts and Jobs Act in the United States ("U.S. Tax Reform") late in 2017."

My target price for adding more shares of FTS is $31.14 USD, which would represent a 4.2% yield at the current dividend and currency exchange rate.

Conclusion

I offer this article as an introduction to three Canadian Dividend All-Stars. It is not my intent to advocate the purchase or sale of any security. My purpose is to offer ideas for stocks to study and to share a journal of my effort to design and maintain a retirement income portfolio that puts a priority on a relatively safe stream of growing dividends from companies with histories of rising dividends, and with strong financials and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.

A complete list of holdings is included in the disclosure statement and on my Seeking Alpha profile.

Your opinions are important. Your comments enrich our discussion. I always learn from our Seeking Alpha conversations.

Disclosure: I am/we are long JNJ, MSFT, XOM, AAPL, WMT, ADP, PFE, MRK, PG, MMM, CSCO, RY, TD, NWN, PEP, ITW, IBM, TXN, CMI, BNS, KMB, QCOM, SPG, CDUAF, FTS, CLX, PPL, WEC, ABBV, NNN, O, SKT, EPD, BIP, BEP, VTR, BCE, T, WPC, MAIN, APLE, ECF, IFN, RMT, RVT, VTI, VEA, VWO, VYM, VYMI, VOE, VBR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.