Sunday, June 11, 2017

Analysis of WestJet

           
         Is it often said one of the worse types of companies to invest in are the airline stocks.  In fact, Richard Branson once said "The quickest way to become a millionaire is to be a billionaire and start an airline".  The airlines as an investment has garnered a lot of attention recently as in the past year Berkshire Hathaway has invested heavily in airlines in the United States. Berkshire Hathaway is the holding company which is ran by Warren Buffett and Charlie Munger.

        In Canada, currently we have 4 airlines which are Air Transat, Porter Airlines, WestJet Airlines, and the Air Canada.  I am going to talk about WestJet Airlines in this article.



        WestJet Airlines (ticker symbol WJA.TO) was started in 1996 by Clive Beddoe and a team of partners with just 3 planes.  WJA.TO is headquartered in Calgary, Alberta, Canada.  The company has grown tremendously since its inception. Often people who work for airlines belong to a union, but this has not been the case for WestJet as most of their workers own shares in the company.

        When people decide to take a trip, they often go on the websites of airlines or to travel agencies to look for a deal.  This makes it harder for the airlines to be profitable and remain profitable over time. Why would some one choose a specific airline over another one if they can save money?  If the savings is not significant, the traveller will choose the airline in which they find the service better.  WestJet believes just because fares are cheaper does not mean poor quality service.

         Personally, I have travelled on both WestJet Airlines and Air Canada, and the service was the same. My very first time on a plane was with WestJet in 2003.  I flight was from Moncton, New Brunswick to Grande Prairie, Alberta and I had to change planes for the final leg of the trip in Edmonton, Alberta.  The last leg of the trip was the airplane get circling the airport and it was late at night.  The lights on the runaway in Grande Prairie were not working, so we went back to Edmonton and were put up in a hotel.  I basically told them, I absolutely refuse to share a room as I do not know anyone. I was allowed to stay in a room with 2 beds by myself without a hassel.

       When deciding on an investment, we have to do research such as pouring over annual reports doing a quantitative analysis and then doing a qualitative analysis.  Quantitative analysis is pouring over the numbers.  Investors can get information from annual reports or from online sites such as google finance or Morningstar.

         WestJet revenues have grown revenues from 2.151 billion in 2006 to 4.123 billion in 2016.  This represents a compound annual growth rate, CAGR, of  7.50%

        This CAGR for revenue of 7.50% for an airline is quite impressive. Over the 10 year period, WestJet has added routes to more destinations and increased frequency of some routes when the time is warranted.   The company has aggressively repurchased shares over this time.  In 2010, WestJet actually issued more shares but have aggressively bought back shares afterwards. Over the 10 year span, the amount of shares outstanding have declined by around 8%.


        WestJet earnings per share have grown from $1.47 in 2007 to $2.45 in 2016.  This represents CAGR of  5.84%. 

        With a bottom-line growth of almost 6 percent for this airline is quite impressive and even more impressive that this includes the great financial recession of 2008-2009 and the fact Alberta is in a recession for the past 3 years due to lower oil prices.
  
        WestJet did not pay a dividend until 2010 and actually the first dividend payment date was January of 2011.  The dividend has grown from $0.20 per share per year to $0.56 per year in 2016.  This represents of CAGR of 18.72% over last 6  years.  A dividend growth rate of 18.72% is impressive for any company and even more impressive for an airline.  The dividend payout ratio for 2016 is 22.4%, so the company has room to grow the dividend in the future.

    Let's turn to the balance sheet.  The long term debt to equity ratio is 0.92. The interest coverage ratio is  9.48.

Currently, WestJet is trading at a P/E ratio of 10.7.  That is well below the broader market. This is also below the stock's own 5 year average of 11.4.  Investors are paying less for WestJet's cash flow than, over average, over the last 3 years.  The current dividend yield of 2.4% for the stock is higher than it's 5 year average of 1.5%.

Valuation

Now we will at the valuation. For a valuation we will use dividend discounted model. I used a dividend growth rate of 12% for the next 5 years then leveling off after that to a 7% growth rate after that. I am using a dividend discount rate of 10%.  With these numbers I have come $24.81

According to Questrade's Market Intelligence, they have Morningstar fair value at $25.00.

If we take a average of these numbers, we get a price of $24.90.

Right now, WestJet is at $22.93 as of Friday's close.  So the company appears to be approximately 9% undervalued.

Conclusion:

As only 2 numbers were used to get an approximation of the average price the stock is worth, I would take this with a grain of salt. The low price of a barrel of crude right now lowers the operating expenses of this company. So for a larger margin of safety, I would not be a buyer at these levels.

Also I do believe WestJet has some headwinds in the future with increase competition and possibility of lower load factors for a couple of years with people tightening their purse strings in fear of recession across North America.

Disclosure:    Currently do not own any shares of WJA.TO in any accounts.

DISCLAIMER
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.




    

Need Money To Start?

           When a person decides to start investing, they often do not know where to start.  What type of investments should an individual pursue?  Well, the potential investor has to know what their time horizon, risk tolerance, hands on or hands off, invest themselves or have someone else invest on their behalf.

          A real estate investor is more hands on then an investor in the stock market. See, a real estate investor might have to deal with tenants directly in gathering rent, doing maintenance, and showing the property to them.  The real estate investor might be involved in choosing the proper, buying the property, getting a mortgage and advertising them. It is said that real estate investing is a business. But a individual must ask themselves if they want to fix toilets, deal with tenants, look for new tenants etc.

           On the other hand, investing in the stock market can be done real hands off or hands on.  If an individual decides they want to be a strict hands off investor, they have to find a stock broker or consult with investing professionals who will manage their money for them. A hands on investor can purchause instruments like precious metals, stocks, bonds, debentures etc by doing their own reseach and clicking a mouse.

         The method the rest of this article is about is investing in the stock market.  The big advantage of the stock market is that an individual can close a position really quick.  However, unless an individual investor has basically no control over the direction of the company unless they own a significant amount of shares already. The stock market is highly liquid.

       A question that always comes up is "Where to I start or how to begin?".  Starting out an individual might not have a lot of money.  I believe an individual should read about how the stock markets works.  He or she should also understand how to read financial statements.

       An individual investor does not need a lot of money to begin.  How to you come up with money to invest in the stock market.  Starting off, an investor needs to keep adding cash to the account.  The investor can buy stocks for cheaper commissions than ten years ago.  An investor can purchase stocks the "old way" which was purchasing stocks directly from the transfer agent or purchasing a share from a person.  The investor can purchase additional shares without commissions.  The downside to purchasing shares directly through the transfer agent is that he or she does not know what the price of the stock at the time of purchase.  If they company overs a discount on their DRIP shares, the investor is guarantee to receive this discount whereas a pseudo DRIP by a brokerage might not pass the discount onto the investor.

        Another method of purchasing stocks, is to pick stocks that pay monthly. For example, the investor saves $100 a week and their position size if $300.  So the position that pays monthly can have it's monthly dividend along with new cash to buy another position of the same stock or a new one.  A way to speed this up is to purchase commission free ETF or a REI,  rather than purchase an individual stock.  The reason for this is the ETFs and the REITs have a higher yield, for all intended purposes.  ETFs and REITs pay distributions whereas a stock pays a dividend.  Unlike a dividend, which is all the same type of income, a distribution can have its payment broken into dividends, return on capital, capital gains or interest.  The investor can take the distribution payment and add it to his own capital to purchase shares.  ETFs and REITs have  pay out 90% of their profits to unit holders. The downside to investing in ETFs or REITs, is that their is not much room for growth unless these raise more money through increasing the amount of units.

         When buying a stock that pays quarterly, an individual has to weigh 3 months to see any income from the investment. This psychologically is difficult to see at the beginning as the payments will be small. With having more money to invest at the beginning, can see an investor stay in the game though more patience and able to not throw in the towel so to speak.

Conclusion:

          Investor's will not see huge returns starting off on their journey.  It takes a while for the snowball to gather momentum and grow, but they can help speed up the process.  An individual is actually doing this right now live in real time. Dan of Sharpe Trade LLC is demonstrating starting from $500 and adding $25 each week, how an individual can build an account that pays you an income. This portfolio, which is called Sharpe Income, has an investing section and a capital gains section. The capital gains section will eventually be used to speed up the income investing side of the book. 

         If an investor buys a monthly dividend paying stock, ETF or REIT, he or she can put that capital back to work quicker.  The downside to this that dividend growth stocks, provide higher returns over the long haul as their businesses tend to grow quicker.  The companies that are considered dividend growth companies can use some of their profits to grow the business.

      The most important thing is to start.  I think a person should pay off their debts first as fast as they can and then save as much as possible this allows you to become financially free at an earlier date.
   

Disclosure:  I have no affiliation with Sharpe Trade or any of their subscription based projects. However, I do follow their public side at www.sharpetrade.com.

DISCLAIMER
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.



        

Wednesday, June 7, 2017

Price of Oil

      Western provinces in Canada have seen their industries change a lot in the past century.  The western provinces are from west to east British Columbia, Alberta, Saskatchewan, and Manitoba.  The latter 3 are also referred to as the Prairies. 

       The Prairies are known for the farmland and the flatness of the land.  Just west  of Edmonton, Alberta the land started  to increase in elevation  as the Rockie Mountains are just a 3-4 hour drive west. Although farming is still great part of the Prairies, the economic landscape changed when conventional oil was discovered in Leduc, Alberta in 1947.  Oil and gas are concentrated mostly in Alberta, but there are concentrated areas of Saskatchewan and British Columbia.

       Alberta in particular is known for boom and bust cycles with the commodity of crude oil.  Alberta has two different methods of extracting oil from the ground.  The first method is by using drilling rigs to drill for oil and all the secondary services. The second method is extraction by mining.  The latter involved extracting oil from the dirt which in the Fort McMurray and Wood Buffalo region of Northern Alberta and if often referred to as the oilsands.  The extraction of oil from the oilsands involves the use of lots of energy and there needs to be a higher price per barrel of crude oil then what the current price is.

       Currently, Alberta has the 3rd biggest oil reserves in the world, behind only Saudi Arabia and Venezuela.  The ecomony of Canada has a lot riding on the oil and gas industry.  The oil and gas industry not only employs people in the western provinces, but people from all over Canada work in the oil industry either moving to where the jobs are or flying back and forth to their place of residence.  The reason they are able to fly back and forth is due to the high wages.

   


        
      The price of a barrel of WTI crude oil was trading at $45.82 at the time of this writing.  It is often said that one operating drilling rig creates around 135 jobs, not all oil field related.  These jobs include restaurants and hotels to service the oil and gas workers.

       From the chart, we can see that oil has been struggling to reach $50  since January 15.  This has caused massive lay offs in the oil and gas sector which leads to people losing their homes and families being torn apart.  People who have high expenses, will find it difficult to replace the income that they made in the oil and gas sector.  The recession in Alberta has effected other businesses and communities all across the country. 

Conclusion:

        In North America, we have not had a recession since the big financial crisis of 2008-2009.  A recession usually happens approximately every ten years.  Currently, we have the stock markets in North America flirting with new all time highs although the price of oil is low.  So if North America goes in to a recession the price of oil will be impacted even more. 

         I think Alberta will be in major trouble if we have a North American recession. 

DISCLAIMER
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

           
        

Saturday, June 3, 2017

Dividend Income Update - May 2017




      The month of May is another month of dividend income landing in my accounts. This money is used to help pay my expenses if it is needed. If the money is not needed, it is ALL used to purchase new investments to further increase my cash flow.

        The price of barrel of crude oil has falling during the month, and it currently sits below $48.00 per barrel.  As April and May is when breakup occurs in the Western Canadian oil patch. There continues to be a major surplus of oil even with OPEC extending cuts for another 9 months.  The tide is turning towards using more renewable energy sources. That being said, the worldwide need for oil will not go away anytime soon.

      One thing for sure, is that I was paid dividends and distributions for being a shareholder or unit holder in  various companies or funds. In  Sept 2016, the Dream Office REIT in the margin account will be counted as dividend income  for the first time.

 Non-registered Account

  • Bank Of Montreal (BMO) - $30.80
  • Emera (EMA) - $52.25
  • Enerplus (ERF)  -$ 5.58
  • Dream Office REIT   (D.UN)  - $77.63
  • Shaw Communications (SJR.B)    - $19.75
  • TD Bank (TD) - $60.00

    TFSA
    • A&W Royalties Income Fund (AW.UN) - $5.05
    • Boston Pizza Royalties Income Fund   (BPF.UN) - $26.91
    • iShares 1-5 yr Laddered Canadian Corporate Bond ETF (CBO) - $0.62
    • Cominar REIT (CUF.UN) - $21.19
    • Dream Office REIT   (D.UN)  - $ 17.63
    • Horizons Natural Gas Yield ETF (HNY)  - $4.13
    • Killam Properties REIT (KMP.UN) - $  15.60


    Total = $337.14
        
        As the amount of distribution from D.UN inside my margin account, will have a large impact on the comparison of dividend income from 12 months ago. This dividend income total of $337.14 represents an increase of 13.88 % from 3 months ago.

         Dream REIT has reduced the amount of distribution they pay monthly which was announced in February 2016.  Recently, I wrote about purchasing more units of D.UN inside a margin account.  Starting in September, the distribution from this D.UN inside the margin account will be included in my dividend income.

        I received $108.15 options premiums in May 2017.
    0
         I will update my dividend income tab with the new amount I will include my option premium income also.  It is great to see money from passive income sources deposited into my brokerage account every single month.

    How was your dividend income for May?

    Disclosure : Long all securities above.

    Photo Credit: www.mipaq,co.za

    DISCLAIMER
    I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

    Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.


    Thursday, June 1, 2017

    Portfolio Update - May 2017

      This is just going to be a quick update as I have been busy lately.

    • Added 5 units of HNY.TO in TFSA at  $13.38 for a total cost of $66.92 including commissions. The commission is free for purchasing some ETFs with my brokerage, but there is a $0.02 ECN fee.  The ECN fee is on a per unit basis so more units purchased would me high ECN fees.
    • My short  $62 Put option in TD.TO expired worthless
    • My short $92 Put option in RY.TO expired worthless. Then sold another put in RY.TO at $91 strike price and a June 2 expiration date.

    Shares Acquired Through DRIP


    3 Unit of D.UN.TO @ $19.8735  for a total cost of $59.62 (Margin Account)

    1 units  of CUF.UN @ $13.2035 for a total cost of $13.20 (TFSA)

    Please note, that the DRIPs inside my margin account and TFSA are synthetic drips which indicate the distribution or dividend must be enough to purchase whole shares. 


    As of April 30, the value of the portfolio is $104822.69  $104236.43 . This is a 0.562 %  increase over last month's total.  The spreadsheet in the investment tab above has been updated.

     Disclosure:   own 100 shares of TD.TO in margin account
                       
    Disclosure:  Long D.UN, HNY, CUF.UN, TD

    Please Note:  All stocks are from the Toronto Stock Exchange.

    DISCLAIMER
    I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

    Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.





    Monday, May 29, 2017

    Brief Review A&W Income Fund Quarter Results

         There is a lot of variety in Canada when it comes to fast food chains.  These restaurants included Burger King, McDonald's, A&W and Wendy's.

          The Fund is a limited purpose trust established to invest in A&W Trade Marks Inc. (Trade Marks), which indirectly owns the A&W trade-marks used in the A&W quick service restaurant business in Canada. The trade-marks comprise some of the best-known brand names in the Canadian foodservice industry. Trade Marks licences these trade-marks to A&W Food Services of Canada Inc. in exchange for a royalty of 3 per cent of the sales of 861 A&W restaurants in Canada. Source: A&W Income Fund website  )                           
           This structure makes the A&W Revenue Royalties Income Fund a "top-line" fund because income is based solely on the sales of A&W restaurants minus the Fund's and Trade Marks' minimal operating expenses, interest on Trade Marks' term debt and income taxes. The Fund is not subject to the variability of earnings or expenses associated with an operating business. (Source: A&W Income Fund website )
    A&W has changed their menu in the last 3-5 years to such as can be found in this list of facts.  I will highlight some of those here:
    • In 2013. A&W started to use beef that is raise without the use of hormones or steroids.
    • In Sept 2014, A&W started using chicken that was raised without the use of antibiotics and fed  a grain-based, vegetarian diet without the use of animal by products.
    • In Feb 2016, A&W started to use pork raised without the use of antibiotics.

        With these changes over the last several years, this has increased the prices on the menu up besides increases due to inflation.  A&W also has a lot of restaurants in Alberta and Saskatchewan, which have seen there economies struggle over the last 3 years with falling oil prices.

          The number of restaurants in the royalty pool increased from 838 to 861, which is updated every January.  This represents a increase of 2.67% in the restaurants in the royalty pool.

          A&W saw a decrease of 0.3% in Same Store Sales growth from the period between January 1 2017 to March 26 2017.  For the same period in 2016, there was an increase of 8.6% in same stores sales growth.

           The royalty income increased from $7314000 for Q1 2016 to $7355000 for Q1 2017, which represents an increase of  just 0.56% .  This small increase in royalty income and increase in expenses for administration of the fund and an increased distribution as pushed the payout ratio higher. Since this is an income fund, A&W must pay out 90% or more of their profits as distributions to unitholders.

          The income fund has fallen over the last month by 10.94% and 3.03% on May 29. The fund pays monthly distributions. 


    Disclosure:  I own 38 units of AW.UN in my TFSA and 115 units of AW.UN in my trading account.

    EDIT (May 30 2018) - This stock has had a rough start to the trading day once again. We have also had lots of things happen recently.  The Green party is British Columbia holds the balance in power.  They now have a agreement in place with the NDP, in which the current government will lose power. If this gets approved then I believe the NDP will form the government.  The NDP has said they will increase corporate taxes.  

       The premier of Ontario has announced that the minimum wage in Ontario will change dramatically. It is already set to go increase from $11.40 to $11.60 this October. In her announcement, Premier Wynne stated the minimum wage will increase to $14 on Jan 1, 2018 and to $15 the following year.  I personally think this will have dramatic effects. People of all income levels are not happy with the prices in stores now. Businesses have to raise their prices in order to increase wages.  

        The minimum wage in Alberta is supposed to be raised by $1.40 on October 1, 2017 and then raised to another $1.40 on October 1, 2018.  A&W has lots of restaurants in Alberta.  With the state of the economy in Alberta, these stores are going to struggle financially.

        I wish I would of set a stop loss in the trading account.  This position has a purchase price of $36.65.


    DISCLAIMER
    I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

    Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

    Saturday, May 27, 2017

    Market Outlook

          The markets are moving sideways or upwards.  At the time of this writing, the S&P 500 closed Friday at 2415.82, which is  slightly below it's all time high. North of the border, the TSX Composite Index closed at 15,416.93.  The TSX Composite Index has been in a channel between basically 15300 and 15900 since the beginning of 2017.

          With the markets being at or near their all time highs, lots of investors are becoming fearful.  In Canada, the energy is one of the main industries for investors to invest in .  With oil trading anywhere between $45 and $53 per barrel, this definitely hurts the bottom lines of the oil patch companies.  In fact, a lot of laid off workers in the oil patch are hesitant to go back.  Furthermore, a lot of companies are offering lower wages. A few months ago, it was mentioned on the Business News Network aka BNN that a company who used to pay people $40 an hour hired people back at $15 an hour.

           The actual drilling rig activity in western Canada can be shown in the following weekly chart.


    Source:  CAODC website




              The price of a barrel, on top of spring "break up", have a large impact on companies willing to drill right now.  These numbers would be slightly higher, but it is spring break up.  Spring breakup in western Canada, usually occurs between April and May. Basically, spring break up is where oil patch activity slows down tremendously due to the thawing of the ground.  The dirt roads become difficult to drive on and lease roads are even more horrific.  A lease road is basically a road off a main road or a dirt road that was not there recently.  These lease roads can be right through a wooded area some times. These lease roads start of smooth and there get more difficult over the time the rig is in operation due to weather events and large trucks coming in and out.  Canada is also a high cost producer for oil.

          Why all the mention on oil?  Energy companies are a major part of the Canadian markets and lot of these companies are struggling to maintain profitability.  To makes matter worse, the North American market is due for a recession. As nobody has a crystal ball,  we do not know when the recession is coming but it has been roughly 9 years since we had one. When there is a recession, the oil companies are not immune.

          Investors in Canada have limited investing opportunities within our borders. In order to invest in some sectors, we have to purchase US stocks. The companies like the Johnson &Johnson, Coca-Cola, Peps, and Phillip Morris do not exist up in Canada. Ideally, Canadians should buy US stocks when our dollar is on par with the US dollar.

       With the Canadian dollar trading at approximately $0.74 US, a Canadian investor is better off purchasing their investments in Canada.  With the state of the financial markets, investors have to be more careful in their entry points. A fellow blogger, Jason Fieber, recently published an article on a Daily Trade Alert with a video which  can you explore here.  At the bottom of Jason's article is a link to a video where Jason talks about how he researches stock.  Jason was the founder of the blog www.divendmantra.com and now is the founder and publisher of mrfreeat33.com

        Conclusion:

         With the markets at an all time highs, investors have be more careful at picking stocks and picking their entry points. Investors need to grow their cash position, so they can take action when an opportunity arises.  We do not know when the recession or a 10% to 20% correction will come.  If we did, we would be all more wealthy than we currently are.

          The new normal consists of less full time jobs and more part time jobs. Usually a company does not provide benefits for part workers.  Nowadays, an individual has to be open to working possible multiple jobs, become self employed or have side hustles.  The cost of living is going nowhere but up whereas wages are become stagnant or even less.  Since the 70s, wages have pretty much stayed the same adjusted to inflation.  I find a lot of people believe they get a "raise", when in fact they get a cost of living increase.  To me, getting a raise involves the employee being called into their boss's office and is praised for good performance and is rewarded by getting paid more. When an employee receives of cost of living increase, so do all his or her fellow employees.  For individuals to be able to invest frequently, their savings rate has to increase.  To increase his or her savings rate, an individual must lower their expenses and make more income.

    DISCLAIMER
    I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

    Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.