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1
Internet Wealth Builder – May 11, 2015
Volume 20, Number 18
I N
T H I S
Issue #21518
I S S U E
Investors look overseas
1
Trudeau declares tax war
3
Energy bounce back looks fragile
3
Ryan Irvine updates Macro
Enterprises, Parex Resources,
High Arctic Energy Services,
Hammond Power Solutions
4
Gordon Pape’s updates:
JCMorgan Chase, Wells Fargo,
Shaw Communications, BCE Inc.
6
B U I L D I N G
The
W E A L T H
Internet Wealth Builder
Editor and Publisher: Gordon Pape
Circulation Director: Kim Pape-Green
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Copyright 2015 by Gordon Pape Enterprises Ltd.
All material in the Internet Wealth Builder is copyright
Gordon Pape Enterprises Ltd. and may not be
reproduced in whole or in part in any form without written
consent. All recommendations are based on information
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Internet Wealth Builder assume no liability whatsoever
for any material losses that may occur. Readers are
advised to consult a professional financial advisor before
making any investment decisions.
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May 11, 2015
INVESTORS LOOK OVERSEAS
By Gordon Pape, Editor and Publisher
The lacklustre returns on North American stock exchanges so far this
year have prompted more investors to look overseas – and they like
what they are finding.
With the year more than one-third over, both New York and Toronto have
been uninspiring. The TSX is showing a year-to-date return of just 3.7%.
On Wall Street, the S&P 500 has added just 2.8% while the gain on the
Dow is 2.1%. The Nasdaq Composite is the star so far, ahead by 5.8%.
Meanwhile, several overseas markets have been racking up doubledigit gains including Paris, Frankfurt, Amsterdam, Hong Kong, and
Tokyo. Not surprisingly, more people want to get in on this action.
Some of them are seeking information on offshore investing options
by using the new Ask The Experts feature on our BuildingWealth.ca
website. For example, Jim B. wrote: “The quantitative easing efforts
in Europe hopefully will continue to foster economic growth. The low
value of the euro also must help large European corporations' sales
to the U.S. in particular. Are there any European ETFs that you could
recommend? Especially those that might be underweight European
financial institutions.”
European markets have been surprisingly strong this year despite the ongoing Greek tragedy that could yet end with that country’s exit from the
euro. As contributing editor Gavin Graham pointed out in a recent column,
European GDP growth is gradually improving and the threat of deflation
appears to be receding. Europe is by no means out of the woods but there
are signs of progress and that has encouraged investors.
Canadian ETF providers have only recently zeroed in on Europe as a
specific area of interest, having previously lumped it in with the
broader EAFE index ETFs (Europe, Australasia, and the Far East).
Three Europe-only ETFs were launched in 2014, as follows:
Vanguard FTSE Developed Europe FTSE Index ETF (TSX: VE). This
one focuses on large and mid-cap stocks in developed European
markets. The largest weightings are in the U.K. (31.1%), France
(14.3%), Germany (also 14.3%), and Switzerland (14.2%). Financial
stocks are the number one sector at 22.7% followed by consumer goods
at 17.8%, health care (12.5%), and industrials (12.4%). Top holdings are
Nestle, Novartis, Roche, Royal Dutch Shell, and HSBC. The fund was
launched at the end of June last year and was showing a year-to-date
Continued on page 2…
Building Wealth’s The Internet Wealth Builder is published weekly by Gordon Pape Enterprises Ltd. All rights reserved.
(12.4%). Top holdings are Nestle, Novartis, Roche, Royal Dutch
Shell, and HSBC. The fund was launched at the end of June last
year and was showing a year-to-date gain of 11.5% as of the close
on May 5. The MER is a very low 0.23%.
2
Internet Wealth Builder – May 11, 2015
Overseas – continued from page 1…
gain of 11.5% as of the close on May 5. The MER is a
very low 0.23%.
iShares MSCI Europe IMI Index ETF (TSX: XEU). This
ETF also zeros in on developed markets but, unlike VE,
includes small-cap stocks in the mix. Interestingly, it has
the same top five holdings as the Vanguard fund with the
exception of Royal Dutch Shell, which is replaced here
by BP. The geographic mix is also similar, with the same
top four countries and much the same asset allocation.
Ditto for the sector breakdown, which has financials at
the top at 22.5%. So it shouldn’t come as a surprise that
the year-to-date performance is almost the same as that
of VE at 11.3%. The management fee is 0.25%. There is
also a hedged version of this fund, which trades under
the symbol XEH. It has a better return so far in 2015,
with a gain of 13.9%.
BMO MSCI Europe High Quality Hedged to CAD
Index ETF (TSX: ZEQ). The Vanguard and iShares
entries are almost twins. This one is a little different and
meets our reader’s request for a fund with low exposure
to financial stocks. It is designed to track the MSCI
Europe Quality 100% Hedged to CAD Index, which
includes large and mid-cap stocks from developed
markets. The emphasis is on stocks with high quality
scores based on three main variables: high return on
equity (ROE), stable year-over-year earnings growth,
and low financial leverage. It’s the last variable that limits
the fund’s exposure to the financial sector to a
remarkably low 1.9%. Instead, the emphasis is on
consumer staples (31.8%), health care (25.7%), and
consumer discretionary (16%). The geographic
breakdown is also different from the other two funds.
The U.K. at 44.4% and Switzerland at 23.3% are the
only two countries in double-digit territory. Germany and
France are down around 5%. This fund has the highest
management fee of the three at 0.4% and the lowest
year-to-date return at 10%.
It’s still too early to know which of these funds will be the
best performer as all are less than a year old. But as
things stand right now, I’d go with either the Vanguard or
the iShares entry because of the lower MER and the
more balanced geographic allocation.
Another reader is interested in new developments in India.
He wrote: “As India is expected to be one of the more
successful countries in the emerging markets, what do you
think of the iShares Indy 50 ETF?” – Alastair F.
India has been generating a lot of excitement since the
election a year ago of Prime Minister Narendra Modi. He
pledged to reform government, cut bureaucratic red
tape, and open the country to foreign investment. The
country’s economy has also been helped by the oil price
plunge – it is estimated that each drop of US$10 in the
oil price is worth an extra 0.5% to the country’s GDP.
Despite the optimism, India’s stock market has been
unimpressive. The CNX 50 Index – the “Nifty 50” as it is
called – was showing a year-to-date return of -2.2% as
of the close of trading on May 5. The initial enthusiasm
that followed Mr. Modi’s victory appears to have given
way to sober second thoughts about the speed of the
country’s forward progress.
For investors who believe there are better days ahead,
here are two Canadian-based ETFs that focus on India.
iShares India Index ETF (TSX: XID). This is the ETF to
which our reader is referring. It tracks the performance of
India’s National Stock Exchange CNX Nifty Index, which
covers 22 sectors of the country’s economy. The index has
a history of high volatility so investors need to be prepared
for a lot of ups and downs. The performance of this ETF
reflects that; it lost 35% in 2011, rebounded 24% in 2012,
was virtually flat in 2013, and surged 39% in 2014 on the
strength of Mr. Modi’s election win. So far in 2015 it is
showing a small loss of 1.1%. This ETF is simply a
Canadian version of the U.S. iShares India 50 ETF (NYSE:
INDY) and all its assets are invested in that fund. The MER
of XID is 0.98% while that of INDY is 0.94% so there’s not
much to choose from there. However, the Canadian
version has produced much better returns because of
currency differentials with a five-year average annual
compound rate of return of 5.85% versus only 2.22% for
the U.S. fund. Stay at home with this one.
BMO India Equity Index ETF (TSX: ZID). This fund takes
a different approach. It tracks the BNY Mellon India Select
DR Index. It is comprised of India-domiciled companies that
are traded as American and global depositary receipts on
the New York Stock Exchange, Amex, Nasdaq, and
London Stock Exchange. It is much more concentrated
than the iShares funds, with more than half the assets in
just four stocks: Infosys, Reliance Industries, HDFC Bank,
and Larson & Toubro. This approach has made it a much
better performer thus far in 2015 with a year-to-date gain of
5.05%. That’s not earth shaking but it’s better than the TSX
or the S&P 500. Longer-term results are comparable to the
iShares fund. The maximum annual management fee is a
better value at 0.65%.
Given the choice, I’d go with ZID in this case. I like the
more focused approach, although it does entail higher
risk, and the lower MER leaves more profit in your pocket.
Follow Gordon Pape on Twitter @GPUpdates and on
Facebook at www.facebook.com/GordonPapeMoney
Building Wealth’s The Internet Wealth Builder is published weekly by Gordon Pape Enterprises Ltd. All rights reserved.
3
Internet Wealth Builder – May 11, 2015
TRUDEAU DECLARES TAX WAR
The Liberals have decided to tackle Stephen Harper’s
Conservative Party on its own turf with an ambitious
Robin Hood-style tax program: take from the rich, give to
the poor (or in this case the middle class).
The plan announced last week would raise Ottawa’s top
marginal rate by four percentage points to 33% on taxable
incomes over $200,000. Liberal leader Justin Trudeau
estimates that will generate about $3 billion in additional income.
Much of that would pay for a cut for middle-income
taxpayers (those with incomes between approximately
$45,000 and $90,000), who would have their rate cut
from 22% to 20.5%.
Some economists were quick to criticize the Liberal plan,
warning that the result would be to raise the top level of
combined federal/provincial rates to over 50% in the
majority of provinces. The top rate in Quebec and New
Brunswick if the plan were enacted would be 58.75%.
It’s a widespread view that rates above 50% encourage
tax avoidance, as was pointed out in a Globe and Mail
article by Bill Curry last week.
However, the Liberals seem to feel that a soak the wealthy
stance will play well with the electorate in the upcoming
federal election. Only time will tell if they are correct.
Buried in the party’s announcement was another pledge
that will send a chill down the spine of some investors.
As part of the master plan to pay for the tax regime
changes, the Liberals would roll back the recent increase
to $10,000 in the contribution limit for Tax-Free Savings
Accounts. They aren’t saying they’ll abolish the plans,
just take the limit back to the original $5,000 a year.
There was no mention as to whether indexing would be
restored in the process. (It was dropped in the budget as
a trade-off for the move to $10,000.)
Tinkering with tax brackets and rates is one thing. Every
government does it. But changing the rules for popular
savings plans such as TFSAs and RRSPs is bad policy.
Surveys consistently tell us that a high percentage of
people don’t understand the details of these savings
plans. This is especially true for TFSAs, which are
relatively new, having been launched in 2009. It’s
unhelpful for any government, Conservative, Liberal, or
NDP, to continually revamp the playing field.
Moreover, the promised rollback may be a serious political
mistake for Mr. Trudeau and his party. A Nanos poll
conducted for The Globe and Mail and released last week
showed that 64% of respondents approved of the TFSA
contribution increase and 55% - more than half of those
surveyed – said they were likely or somewhat likely to save
more money in their plans over the next two years.
“Even if you try to argue that many Canadians will not take
advantage of it, I think it would be fair to say that for the
average Canadian, just knowing that they could put more
money in a Tax-Free Savings Account is probably a political
win,” the Globe quoted pollster Nik Nanos as saying.
Although some economists have warned that the TFSA
contribution increase will compromise government
revenue in the future, the short-term effect of a rollback
would be negligible. According to the budget annexes,
the fiscal cost of the move for Ottawa will be $85 million
in the current fiscal year, rising to $360 million in 20192020. The five-year total is $1.135 billion, which is a drop
in the bucket in terms of federal revenues.
We can debate the pros and cons of the Robin Hood tax
plan – and we most certainly will in the coming months. But
let’s leave TFSAs and RRSPs alone. Both are popular
programs that encourage savings – more of which we
desperately need. Don’t mess with them. – G.P.
ENERGY BOUNCE BACK LOOKS FRAGILE
We welcome back contributing editor Ryan Irvine
who revisits some of his energy-related picks in the
context of the new reality in the sector. Ryan is the
CEO of KeyStone Financial and one of the country’s
top experts in small cap stocks. Ryan Irvine writes:
This year, and more acutely over the past month, we
have seen a sharp uptick in a select number of the
energy related stocks from our coverage universe from
the lows experienced after the oil price shock which
began this past fall.
As oil prices have shown strength in recent weeks,
investors have bid up what we consider the more quality
(profitable) energy shares, including Parex Resources Inc.,
which has seen its shares gain over 50%, from the January
Continued on page 4…
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4
Internet Wealth Builder – May 11, 2015
Fragile Bounce – continued from page 3…
lows. Shares in Macro Enterprises Inc. have more than
doubled since dropping to 52-week lows in January of this
year. Some of the gains are deserved as the price declines
are typically overdone as panic sets in. However, we do
see some risk in the segment as capital spending has
ground to a halt near-term. Crude is now well above its
lows but still remains 35% lower than the levels we saw at
this time last year and by most reports, the world remains
awash in the stuff at the moment.
Given this widely held view, it is unclear as to whether a
continued uptick in oil is sustainable. At the very least, the
rally appears somewhat fragile. What we do know is that
capital spending will be significantly lower in the energy
segment for at least 12 months. As such, we are not looking
to add to our exposure in this group and will take the
opportunity to cut some names following the recent uptick.
We stress that nearly all of these companies will be
facing significantly lower year-over-year results for the
next 12-18 months at a minimum. As a result, we are
cutting ratings on Macro and Parex – details and specific
recommendations on each are provided in my updates.
For example, in the case of Parex, we continue to
see the stock as the best of the Canadian-listed
international oil producers. However, given the
recent gains in the share price, we view the stock as
fair to moderately richly valued at present. Of course,
if oil continues to move higher, these stocks will
perform well. We just do not feel it is necessary to be
overexposed to this volatile segment at present. For
unique exposure to the segment we continue to
recommend High Arctic Energy Services, which pays
a healthy dividend and is well positioned to post
strong cash flow in 2015 when most in the segment
will face significant declines.
RYAN IRVINE’S UPDATES
Macro Enterprises Inc.
(TSX-V: MCR, OTC: MCESF)
Originally recommended on June 2/13 (#21320) at C$3.63,
US$3.62. Closed Friday at C$2.50, US$2.45 (May 4).
Background: Headquartered in Fort St. John B.C.,
Macro’s core business is providing pipeline and facilities
construction and maintenance services to major
companies in the oil and gas industry in Northeastern
B.C. and Northwestern Alberta.
Outlook: As a result of the significant decline that
commodity prices experienced during the second half of
2014 and through the start of 2015, activity levels in the
oil and gas industry have been materially impacted
across Western Canada. Although the pricing
uncertainty is affecting activity and many projects have
been delayed, Macro reported that large oil and gas
companies are continuing to request bids on significant
projects, both LNG (liquefied natural gas) related and
not. With a solid balance sheet, the company is
positioned to weather these uncertain times.
Management is anticipating revenues in the first half of
fiscal 2015 to be significantly less than those recorded in
the same period last year, which were a record at the
time. Rather, it is looking for revenue that is more closely
aligned with what was recognized in the second half of
the prior year. The company is targeting margins more in
line with historical averages and as such expects to see
financial improvements to its operations throughout the
upcoming year.
Growth wildcard: As part of its strategy, the company is
seeking construction contracts in connection with the
LNG projects being planned on the west coast of British
Columbia. This is an industry that is anticipated to bring
substantial economic activity to B.C. over the next 30
years. Macro has completed bid processes and has
entered into discussions with the LNG project owners
regarding future pipeline and facilities construction.
Macro has also been approached by several major
clients to assist with budget and constructability
estimates for major pipeline and facility projects that are
not LNG related. These projects are scheduled for
approvals by mid to late 2015.
Conclusion: Macro’s shares have more than doubled
since its oil price driven lows hit earlier in the year, when
it bottomed out at $1.17 on Jan. 30. While we believe the
company is well positioned to benefit from infrastructure
and LNG work if and when new projects come online,
the current environment will produce year-over-year
declines in revenues throughout 2015. While
management has stated that it expects margins to be
closer to historical averages in 2015, there is a danger
that the low price environment increases competition
and makes the company even more of a risk taker,
particularly over the next year.
Macro has a strong balance sheet and its CEO known
as a first-rate operator in a tough business, so the
Continued on page 5…
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Internet Wealth Builder – May 11, 2015
Ryan Irvine’s Updates – continued from page 4…
company will survive this downturn. The firm has idle
equipment ready for larger scale work and at present is
essentially a “lottery ticket” on higher energy prices and
the long-term development of West Coast LNG.
For those that like this type of investing, the company offers
value at this stage, but we prefer more consistent and
predictable cash flow that is less dependent on a very
volatile commodity. In the case of Macro, given the current
environment, we have a great deal of difficultly realistically
modeling cash flow over the next 12-18 months. Ultimately,
the company’s fortunes will be tied to higher energy prices.
If oil and gas continue to move up and sustain pricing, the
lottery ticket will have a far greater chance of paying off and
the rewards could be strong, but it’s all very unpredictable
in the current environment.
Bearing all these factors in mind, we advise using the
recent share price rise as a chance to divest our position
in Macro and focus on less volatile companies to profit
from a rise in energy prices.
Action now: Sell.
Parex Resources Inc.
(TSX: PXT, OTC: PARXF)
Originally recommended on July 28/13 (#21328) at C$5.38,
US$5.23. Closed Friday at C$9.65, US$8.23 (May 6).
We introduced to Parex Resources Inc. to IWB members
in July 2013 at $5.38. In May last year, with the stock
trading in $11.50 range, we recommended readers sell
half of their original positions in this Colombia light oil
producer for a gain of 114%.
Background: Headquartered in Calgary, Parex is engaged
in oil and natural gas exploration, development and
production in South America and the Caribbean region.
Outlook: Parex has continued an impressive and positive
multi-year track record of year-over-year growth in reserves
and cash flow. The company continued to build on this in
2014. While we expect reserves to once again grow in 2015,
cash flow will not in the current oil price environment.
When we first recommended Parex, the company traded
at a significant discount to its peers on a cash flow and
net asset value basis. Today, Parex has developed into
a company with one of the best combinations of
management, assets, and balance sheet strength in the
Canadian national and international exploration and
production segment, with an impressive track record of
value creation through acquisitions and the drill bit. We
expect Parex to maintain balance sheet strength relative
to its peers in a reduced oil price environment,
positioning itself to restart growth with opportunistic
acquisitions or development of significant existing
organic projects when oil prices recover.
Having said this, the company no longer trades at a
discount to its peers given the relative strength of its
shares in a dismal market. From a valuation basis,
Parex’s 2015 expected EV/DACF (enterprise value to
discounted annual cash flow) is currently 6.2 versus
international peers at 4.4. The company trades at around
7.5 times the current year’s cash flow estimate versus
2.8 times when we originally recommended the stock. A
good deal of the multiple expansions has come as a
result of the drop in crude prices and would be resolved
to a degree with oil returning to the US$80-$90 range.
Growth potential: Potential catalysts include results
from exploration and appraisal/development drilling that
have now restarted following a short hiatus at the
beginning of this year.
Conclusion: Following the stock’s outperformance
recently, we now view Parex as trading at a significant
premium to a majority of its closest peers on net asset
value metrics. Therefore, we are downgrading our rating
to Sell near term and placing the company on our
monitor list. We continue to see Parex as one of the best
international junior oil producers, but its shares are not
fundamentally inexpensive at this time.
Action now: Sell.
High Arctic Energy Services Inc.
(TSX: HWO, OTC: HGHAF)
Originally recommended on Sept. 2/13 (#21332) at
C$2.85, US$2.55. Closed Friday at C$4.25, US$3.53.
Background: High Arctic is an international oil and gas
services company with operations in both Papua New
Guinea (PNG) and Western Canada. High Arctic’s
substantial operation in Papua New Guinea is comprised
of contract drilling, specialized well completion services
and a rentals business, which includes rig matting,
camps, and drilling support equipment.
Results: High Arctic reported strong performance for the
fourth quarter and full year of 2014 with growth in
earnings and EBITDA and continued accumulation of
cash on the balance sheet.
The company reports that while the sharp decline in oil
prices in the fourth quarter of 2014 has significantly reduced
oil field activities in most regions of the world, High Arctic’s
operation in PNG has not felt the effects of these declines as
operators in PNG continue to focus on LNG development.
Continued on page 6…
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6
Internet Wealth Builder – May 11, 2015
Ryan Irvine’s Updates – continued from page 5…
Outlook: Looking forward into 2015, the outlook appears to
be solid with the company’s recently acquired drill rigs (Rig
115 and 116) scheduled to commence operation in the
second and third quarters, both under two-year contract
agreements. However, as High Arctic’s new drill rig
acquisitions won’t fully begin to contribute to earnings until
the latter half of the year, we may see a moderate decline
in earnings and EBITDA in the first half of 2015 due to
expected weakness in the Western Canadian operations
and lower utilization in the rental business in PNG.
For the full year of 2015, we expect earnings and EBITDA
to be flat to moderately ahead of the 2014 performance
with growth in 2016. Relative to the peer group of energy
service companies, High Arctic is extremely well positioned
in the current market with a stable earnings profile, very
solid balance sheet with $0.66 per share in net cash (and
growing), and an attractive valuation.
Although we are generally advising investors to keep a
minimal to moderate level of exposure in oil and gas
producers and services companies, we continue to see
significant upside in High Arctic over the next one to
three years and view the stock as generally superior to
its peer group and a solid growth and income investment
in the energy sector.
Action now: Buy.
Hammond Power Solutions Inc.
(TSX: HPS.A, OTC: HMDPF)
Originally recommended on Jan. 28/13 (#21304) at
C$8.60, US$8.58. Closed Friday at C$6.75, US$5.58.
Finally, we take a quick look at Hammond Power
Solutions Inc., originally recommended in January 2013
when the stock traded at $8.32. The stock has been a
laggard in our portfolio, closing this past week at $6.75.
Background: Hammond Power is a North American
leader in the design and manufacture of dry-type custom
electrical engineered magnetics, electrical dry-type, and
cast resin transformers. Leading edge engineering
capabilities, high quality products, and responsive
service to customers’ needs have all served to establish
HPS as a technical and innovative leader in the electrical
and electronic industries.
Growth potential: Over the past five years, Hammond
Power has invested in a number of growth initiatives
including international acquisitions, capacity expansion
strategies, new product development, and increased capital
spending for strategic projects – all in anticipation of a
sustained recovery and growth in its primary markets.
Conclusion: To date, this hoped-for sustained recovery
has yet to gain real traction. The negative impact of an
erratic and unpredictable economy as well as the
variability of foreign currency exchange rates,
manufacturing throughput, raw material commodity costs,
and market pricing pressures has affected the company.
To a large degree, the company’s capacity has been too
large for the amount of business the market is
generating. As a result of the lack of throughput, its
factories have not operated nearly as efficiently as the
company had anticipated and margins have suffered.
We do expect that as the market recovers, Hammond
Power will gain the throughput necessary to push margins,
but the near-term outlook remains muddied. The business
is a good one and not going anywhere. We maintain our
Hold rating on the stock, potentially upgrading Hammond
when we see a sustainable uptick in business.
The company has entered a new market, which may
enhance profitability by year’s end. We will monitor closely.
Action now: Hold.
GORDON PAPE’S UPDATES
JPMorgan Chase & Co. (NYSE: JPM)
Originally recommended by Tom Slee on Feb. 3/13
(#21305) at $47.85. Closed Friday at $65.49. (All figures
in U.S. dollars.)
The share price of this big U.S. bank strengthened
following the release of stronger than expected firstquarter results. The company reported net income of $5.9
billion ($1.45 per share), up from $5.3 billion ($1.28 per
share) in the first quarter of 2014. Revenue was up almost
$1 billion year-over-year (about 5%) to $24.82 billion.
The revenue gain was predominantly driven by strong
performance in the Corporate & Investment Bank, both
in markets and investment banking. In addition, there
was an increase in fee revenue in Asset Management
and Mortgage Banking, partially offset by lower gains in
Private Equity. Net interest income was $11 billion,
relatively flat compared with the prior year.
The company announced a 10% dividend increase,
Continued on page 7…
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7
Internet Wealth Builder – May 11, 2015
Gordon Pape’s Updates – continued from page 6…
effective with the next payment, to $0.44 per quarter ($1.76
annually). At the current price, the shares yield 2.5%.
Action now: The stock remains a Buy for long-term
growth and modest cash flow.
Wells Fargo & Co. (NYSE: WFC)
Originally recommended on Jan. 27/13 (#21304) at
$35.14. Closed Friday at $56.05. (All figures in U.S.
dollars.)
First-quarter results from another major U.S. bank were
less impressive. Wells Fargo reported earnings of $5.8
billion ($1.04 per share), down slightly from $5.9 billion
($1.05 per share) in the same period of 2014. Revenue
was up by a modest 3%, to $21.3 billion. A drop in net
interest income was the main drag, although it was due
mainly to timing.
Credit losses improved by 4% over the fourth quarter of
2014, coming in at $708 million. “Nonperforming assets
declined by $618 million, or 16% annualized) from the
prior quarter, and early stage delinquencies dropped,”
said chief risk officer Mike Loughlin. “We released $100
million from the allowance for credit losses in the first
quarter, reflecting continued credit quality improvement.
Future allowance levels may increase or decrease
based on a variety of factors, including loan growth,
portfolio performance and general economic conditions.”
Despite the flat bottom line, the bank announced a 7%
dividend increase, to $0.375 per quarter ($1.50 per
year). The next dividend is payable on June 1 to
shareholders of record as of May 8. The stock yields
2.7% at the current price.
Action now: Buy.
Shaw Communications
(TSX: SJR.B, NYSE: SJR)
Originally recommended on Feb. 3/08 (#2805) at
C$20.53, US$20.64. Closed Friday at C$27.44,
US$22.71.
The shifting landscape in Canada’s telecommunications
sector due to new CRTC rulings is hitting corporate
bottom
lines
hard.
Calgary-based
Shaw
Communications was among the casualties, reporting a
big drop in profits when it released results for the second
quarter of the 2015 fiscal year on April 14.
Net income for the period was $168 million ($0.34 per
share) compared to $222 million ($0.46 per share) for
the same period last year. Net income for the first six
months was $395 million ($0.81 per share), down from
$467 million ($0.98 per share) the year before.
Second quarter revenue was $1.34 billion, up 5% yearover-year. First half revenue was $2.73 billion, an
improvement of 3%.
A significant portion of the profit decline was due to the
decision by the CRTC that enabled customers to cancel
long-term plans. CEO Brad Shaw said that, while the
company supports the CRTC’s “commitment to
maximize choice for Canadians” the new regulatory
environment “will not be without its challenges”.
The share price fell by more than $1 after the results
came out and the stock is down 14% from its all-time
high of $31.93 reached on Dec. 29. The only good news
is that the lower share price has increased the yield to
4.3%. The stock pays a monthly dividend of $0.0987
($1.1844 per year).
Action now: Hold. We still haven’t seen all the fallout
from the CRTC’s rule changes.
BCE Inc. (TSX, NYSE: BCE)
Originally recommended on Dec. 14/08 (#2844) at
C$21.30, US$17.06. Closed Friday at C$53.80, US$44.28.
The uncertainty created by the CRTC has also hit BCE
shares, which are down 10.6% from their all-time high of
$60.20, reached in early February. However, in this case the
sell-off appears to be overdone. Investors appear to be
nervous about the future financial impact of various CRTC
decisions on wireless services, cable TV, and broadcasting.
The company beat expectations with its first-quarter results
that featured an impressive increase of more than 35,000
new wireless customers. Wireless is the big growth area for
communications companies these days; BCE generates
only 9% of business from wireline home phones.
The growth in wireless powered the company to a 2.8%
year-over-year increase in revenue, to $5.24 billion.
Adjusted net earnings were up 12.6% to $705 million.
Adjusted earnings per share were $0.84, up 3.7%. Free
cash flow was $231 million ($0.27 a share), down from
$262 million ($0.34 a share) last year. That’s not good
news as the company ties its dividend directly to free
cash flow, aiming to pay out 65% to 75% of that amount
to shareholders.
Action now: BCE remains a Buy although mainly for
income at this time. Growth is likely to be minimal until
investors can assess the full impact on the company of
the various CRTC rulings. – G.P.
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